A company with high operating leverage will generally experience which effect when sales change?
Correct answer: A. A larger percentage change in EBIT
- A. A larger percentage change in EBIT
- B. A smaller percentage change in EBIT
- C. No change in fixed operating cost
- D. A direct fall in financial risk
Explanation
Operating leverage results from fixed operating costs such as rent and depreciation. Because these costs do not change directly with sales, a change in sales can produce a larger percentage change in operating profit, or EBIT.
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Business finance explains how organisations plan, obtain and use money while balancing risk, return and liquidity. Topics include financial statements, time value of money, budgeting, working capital, capital structure, sources of finance, investment appraisal and cost of capital. Capital budgeting evaluates long-term projects, whereas working capital manages day-to-day operations.
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