Operating leverage measures

Question

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Operating leverage measures the effect of fixed operating costs on the responsiveness of the firm's earnings before interest and taxes to changes in the level of sales. It is calculated by dividing the contribution margin (difference between sales revenue and variable costs) by the earnings before interest and taxes (EBIT). A higher operating leverage indicates that a small change in sales volume will result in a more substantial change in EBIT, which can be either positive or negative depending on the level of sales.

Operating Leverage Measures