Question

Which formula is used to measure the degree of Operating leverage?

• A. $\frac{EBIT}{Sales}$
• B. $\frac{C}{EBIT}$
• C. $\frac{EBIT}{EBT}$
• D. $\frac{EBIT}{C}$

Answer 1

The correct option is B $\frac{C}{EBIT}$

Operating leverage is a financial efficiency ratio used to measure what percentage of total costs are made up of fixed costs and variable costs in an effort to calculate how well a company uses its fixed costs to generate profits.

operating leverage to calculate a firm’s break-even point and estimate the effectiveness of pricing structure.

Therefore $DOL=\frac{Contribution}{earning}$ before interest and tax