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The degree of operational leverage (DOL) reflects the ration of

total fixed costs to variable cost which, substracted from TR


determine the firms profits (=TR-TC) and are also rucial to
determine BEP. Therefore knowledge regarding the firm’s
DOL is a must for its managent to make sound decisions
regarding the firm’s profitability. On the one hand a
company with high operating leverage depends more on sales
volume to generate profits. Such a company would need to
generate a high volume of sales to offset high fixed costs.
That is, the firm generates more profit as volume of sales
increases. But on the other hand this is not true for a firm with
a low operating leverage. For such a firm a higher volumen of
sales does not generate more profit because variable costs
rise proportionately with sales volume. Thus for management
to make the decision to increase production and generate a
higher volumen of sales knowledge of the firms operational
leverage is crucial. Management should be aware of the fact
that DOL is always greatest close tho BEP. Therefore, DOL is
important in the determination of breakeven activity levels
(zero profit activity level) where TR=TC.

crease in volumen of sales would not gemerate higher In


a company with a cost structure that has low operating
leverage, increasing sales volume will not dramatically
improve profitabilitysince variable costs increase
proportionately with sales volume.