What is Operating Leverage?
AThe use of fixed financial interest costs in funding operations
BThe degree to which a firm uses fixed operating costs in its cost structure
CThe ratio of total assets to total equity
DThe percentage of sales retained as net income
Explanation
Core Concept: Operating leverage arises from fixed operating costs (e.g., depreciation, rent). High operating leverage means small percentage changes in sales cause large percentage changes in EBIT. Context/Distractors: Financial leverage involves fixed interest/debt financing costs. Exam Tip/Key Fact: Degree of Operating Leverage (DOL) = Percentage Change in EBIT / Percentage Change in Sales.
Exam Relevance
- Topic: Corporate Finance
- Subtopic: Leverage Analysis
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