BACHELOR OF BUSINESS ADMINISTRATION

Detailed explanation-1: -When a company uses increased fixed cost for production, this is an example of operating leverage. Operating leverage is a cost-accounting formula that measures the degree to which a firm or project can increase operating income by increasing revenue.

Detailed explanation-2: -One of the most important factors that affect a company’s business risk is operating leverage; it occurs when a company must incur fixed costs during the production of its goods and services.

Detailed explanation-3: -Some companies earn less profit on each sale but can have a lower sales volume and still generate enough to cover fixed costs. For example, a software business has greater fixed costs in developers’ salaries and lower variable costs in software sales. As such, the business has high operating leverage.

Detailed explanation-4: -Examples of fixed costs are rent and lease costs, salaries, utility bills, insurance, and loan repayments.

Detailed explanation-5: -Example 3: The variable cost per unit is $50 and the fixed operating costs are $50, 000 per year. The fixed interest expenses (non-operating) are $25, 000 and the firm has 10, 000 shares outstanding. Let us evaluate the combined leverage resulting from sale of 1) 2000 units & 2) 3000 units. Tax rate = 35%.