GENERAL KNOWLEDGE

Detailed explanation-1: -The operating leverage emerges as result of existence of fixed element in the cost structure of the firm. The operating leverage may be defined as firm’s position or ability to magnify the effect of change in sales over the level of EBIT.

Detailed explanation-2: -Operating leverage occurs when a company has fixed costs that must be met regardless of sales volume. When the firm has fixed costs, the percentage change in profits due to changes in sales volume is greater than the percentage change in sales.

Detailed explanation-3: -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-4: -Operating Leverage measures the proportion of a company’s cost structure that consists of fixed costs rather than variable costs. A company with more fixed costs relative to its variable costs is considered to have higher operating leverage.

Detailed explanation-5: -Operating leverage-Extent to which an organization’s cost structure is made up of xed costs. Operating leverage is high in rms with a high proportion of xed costs and a low proportion of variable costs and results in a high contribution margin per unit.