Describe how a financial manager could use the accounting degree of operating leverage when deciding to expand operations?

The degree of operating leverage is a measure that compares the rate of change in a company's earnings per share (EPS) and its sales. It is used to evaluate the potential risk and return associated with increasing sales revenue. Here's how a financial manager could use it when deciding to expand operations:

1. Understanding the Concept: The first step is to understand what the degree of operating leverage is. It's a measure of how a percentage change in sales volume will affect operating profits. Essentially, companies with high operating leverage are more sensitive to changes in sales volume.

2. Calculating the Degree of Operating Leverage: The degree of operating leverage can be calculated by adding fixed costs to the contribution margin ratio (contribution margin divided by sales). The higher the degree of operating leverage, the more the company's operating income will change with a change in sales.

3. Analyzing the Degree of Operating Leverage: If the degree of operating leverage is high, it means that the company has a high proportion of fixed costs in its cost structure. This could mean that the company has a high potential for profits, but also a high risk if sales fall.

4. Making Decisions Based on the Degree of Operating Leverage: If the company is considering expanding operations, the financial manager would need to consider the degree of operating leverage. If it's high, the company could potentially make a lot of profit from the expansion, but there's also a lot of risk involved if the expansion doesn't lead to increased sales.

5. Risk Assessment: The financial manager would need to assess whether the potential profits from the expansion would outweigh the potential risks. This would involve looking at factors such as the company's current financial situation, the state of the market, and the potential for increased sales.

6. Final Decision: Based on the degree of operating leverage and the risk assessment, the financial manager would then make a decision about whether to go ahead with the expansion. If the potential profits outweigh the risks, it might be a good idea to expand. If not, it might be better to hold off on expansion.