What is the relationship between fixed costs and operating cash flow in calculating DOL?

The correct relationship between fixed costs and operating cash flow (OCF) in calculating Degree of Operating Leverage (DOL) underscores that higher DOL typically indicates a higher proportion of fixed costs relative to OCF.

DOL measures the sensitivity of a company's operating income to changes in sales volume. It essentially reflects how much operating income will change with a change in sales. When fixed costs are high, a minor change in sales can lead to a significant change in operating income, thus increasing DOL. This is because fixed costs do not fluctuate with sales levels in the short term; they remain constant, while operating income will vary more dramatically with sales, leading to high leverage. Therefore, when fixed costs represent a larger proportion of total costs, the DOL increases, demonstrating that the business is taking on more operational risk as a result of these fixed costs.

In contrast, the other possibilities do not accurately capture the essence of the relationship. For instance, while higher fixed costs could influence DOL, they would not decrease it; they would increase it instead. Lower operating cash flow does not inherently increase DOL, as DOL is primarily dependent on the ratio of fixed costs to the effects of changes in sales. Lastly, to state that DOL