Question

The operating leverage takes place when _______________________.

• A. A change in revenue produces a small change in EBIT
• B. A change in revenue produces a greater change in EBIT
• C. A change in cost produces a small change in EBIT
• D. A change in cost produces a greater change in EBIT

Answer 1

The correct option is B A change in revenue produces a greater change in EBIT

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.This indicates the expected response in profits if sales volumes change.