DOL Confusion

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CFAHouston

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DOL is the change in earnings given change in sales

so formula is % change in EBIT / % change in Sales

then they give the formula : Q(p-v) / Q(p-v)-f

What I don't understand is how Q(P-V) equals represents.

I can memorized the formula, but just don't understand the concept behind it.
 
how did u get it? i asked this q before.
why the num and denom in % are inversed the position with there value difference?
 
We know that EBIT = Q(P-V)-F
assumption - Price (p) and fixed cost (f) are constant.

DOL = %Change in EBIT / %Change in sales

% Change in EBIT = Change in EBIT/Initial EBIT. Initial EBIT = Q(P-V) - F

So keeping in mind that P & F are constant - we have Change in EBIT: change in Q (P-V)/

So % change in EBIT = Change in Q (P-V) / Q(P-V)-F - this is the numerator

As for denominator - % change in sales =
Change in sales/initial sales


So DOL =

Change in Q(P-V)/Q(P-V)-F
__________________________
Change in Q/Q

No doing algebra this equals to (Change in Q(P-V)/Q(P-V)-F) * (Q/change in Q)

which equals Q(P-V)/Q(P-V)-F

Hope this made sense. If you have the fundamenal of Financial management of CFAI curriculum, this is explained.

If you still have trouble, I can scan the pages and send it to you.
 
i understand the logic, but still not clear with the exact deduction.
thx anyway, i will just memorize both formulas
 
Basically by using more fixed costs and thereby lowering variable costs you do 2 things, in economic terms, you would increase your margin profit when you are on the marginal revenue curve above fixed costs at a faster rate because you have a lower marginal variable cost curve. In other words the fixed cost curve sits higher on the Y axis, so there is a higher break even curve, but the AVC is not as steep as a less levered firm; in other words with a higher break even, but less steep AVC you will make profit at a great rate at a point above your cost curves at a great rate than a less levered firm.

That is what the formulas are basically saying, as sales (marginal revenue) increase your operating profits increase because once fixed costs are recovered, you have a higher marginal operating profit margin.
 
Anybody have any sample problems on getting the change in EBIT when given DTL DOL & DFL...I ran across one but can't find it???
 
Nope, haven't came accross one yet.

I'm sure you'll need more than just DTL, DOL, & DFL.

Cause DTL = DOL * DFL. So, to find change in EBIT, we would need atleast EPS or Q.
 
I saw a couple in schweser they went like this, in a nut shell: Sales was 600 in 20x1 and 800 in 20x2, EBIT was 250 and 325, what is DOL, answer 30%/25% = 1.2.

DFL question eg: Ebit changed from 250 --> 325, EPS changed $2.00 --> $2.95, DFL = 1.583 = %change is eps/ % change in Ebit.

For a DTL, EPS (%change)/ Sales (%change)
 
jamespucyk Wrote:
-------------------------------------------------------
> I saw a couple in schweser they went like this, in
> a nut shell: Sales was 600 in 20x1 and 800 in
> 20x2, EBIT was 250 and 325, what is DOL, answer
> 30%/25% = 1.2.
>
> DFL question eg: Ebit changed from 250 --> 325,
> EPS changed $2.00 --> $2.95, DFL = 1.583 = %change
> is eps/ % change in Ebit.
>
> For a DTL, EPS (%change)/ Sales (%change)

James, bro - dude, I would LOVE if their exam questions were this easy. They've prectically spelled the stuff out for you - although, I can see them being no math and all conceptual. That's one of the things our instructor in Edmonton this weekend stressed in his questions...way less dependence on punching in numbers on our calcs and more on the actual concepts and being able to manipulate them in your head.

These would be totally "freebies" though!
 
That is greatly simplified, I cut out step 1 and 2 and went to step 3, if I didn't mention that.
 
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