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Management · Q64

Financial Management

Graduate and Post Graduate · Management · question 64

Q64

Operating leverage = ______.

A.
contribution / EBIT
Answer
B.
contribution / EBT
C.
contribution / total expenses
D.
contribution / operating PBT

Answer: Option A

Solution

Answer: Option A
Solution:
Operating leverage = contribution / EBIT. A firm's operating leverage is defined as the percentage change in the firm's operating earnings (EBIT less any non-operating income), that accompanies a percentage change in the contribution margin. That is, the operating income elasticity with respect to the contribution margin.