Degree of Operating Leverage

CFA Level I
#1

DOL = Contribution Margin / Net Operating Income or DOL = Contribution Margin / (Contribution Margin - Fixed Operating Costs)

Say the given is:

Units sold: 550,000 | CM: 11.2 million | Fixed Operating Cost: 4.5m

Using the formula, we get (11.2m)/(11.2m-4.5m) = 1.67

I get that part.

But let’s say instead of 550,000 units you sold 250,000 units. The contribution margin per unit should be 11.2 million divided by 550,000 units or 20.363. Selling 250,000 units gives you a CM of 250,000 * 20.363 = ~5.09m. Fixed cost stays the same at 4.5m. Inputting these numbers into the original DOL formula:

DOL = 5.90m / (5.09m - 4.5m) = 8.63

Why does the DOL change? At what point in this exercise did I make a wrong assumption?

#2

The DOL should be 5. 09 m/(5.09m-4.5m)=8.63 , you have a typo on the part I bolded.

To answer your question the less the sale/revenue the Higher the DOL because you are contributing less to the Fixed Cost. In other words the FC is eating a big part of your profits after taking into consideration variable costs.