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Question
Operating leverage works when:
Operating leverage works when:
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Solution
The correct option is B Both A and B
Operating leverage is a measurement of the degree to which a firm incurs a combination of fixed cost and variable cost. The ratio of fixed and variable cost that a company uses determines the level of operating leverage.
To calculate the operating leverage, divide the contribution by its net operating income. Contribution is the difference between sales and variable cost. Sales is a major element for calculating the operating leverage, hence any change in sales will affect the operating leverage.
Operating leverage is a measurement of the degree to which a firm incurs a combination of fixed cost and variable cost. The ratio of fixed and variable cost that a company uses determines the level of operating leverage.
To calculate the operating leverage, divide the contribution by its net operating income. Contribution is the difference between sales and variable cost. Sales is a major element for calculating the operating leverage, hence any change in sales will affect the operating leverage.
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