Hope you can help me with this. There seems to be a gap in my knowledge when it comes to DOF.
- DOL = %change in EBIT / %change in sales.
However, i cannot reconcile it with the other formula.
- DOL= Q(P-VC) / Q(P-VC)-FC. [For a fixed Q]
According to 2), DOL is a ratio of the earnings before the deduction of fixed cost / Earnings after the deduction of fixed cost.
Earnings after deduction of fixed cost = EBIT
My question is if my understanding of 2) is correct, how does the two formulas equate. Other than EBIT, i do not see anything that will link the two formulas.
I hope someone can help me.
Thanks in advance!