101 Concepts for the Level I Exam

**Degree of operating leverage (DOL)** measures operating risk. It is the ratio of the percentage change in operating income to the percentage change in quantity sold.

where:

Q: Quantity sold,

P: Unit price,

V: Variable cost per unit,

F: Fixed operating costs

S: Dollar amount of sales,

TVC: total variable costs,

**Degree of financial leverage (DFL)** measures financial risk. It is the ratio of percentage change in net income to percentage change in operating income.

where:

Q: Quantity sold,

P: Unit price,

V: Variable cost per unit,

F: Fixed costs

I: Fixed financial costs

**Degree of total leverage (DTL)** combines DOL and DFL. It is the ratio of percentage change in net income to percentage change in units sold.