GENERAL KNOWLEDGE

Detailed explanation-1: -Operating leverage measures a company’s fixed costs as a percentage of its total costs. It is used to evaluate a business’ breakeven point-which is where sales are high enough to pay for all costs, and the profit is zero.

Detailed explanation-2: -Leverage is the use of fixed costs in a company’s cost structure. Fixed costs that are operating costs (such as depreciation or rent) create operating leverage. Fixed costs that are financial costs (such as interest expense) create financial leverage.

Detailed explanation-3: -Formula for Degree of Operating Leverage Since the operating leverage ratio is closely related to the company’s cost structure, we can calculate it using the company’s contribution margin. The contribution margin is the difference between total sales and total variable costs.