Business Administration - Accounting & Financial Planning FIN401 Lecture Notes - Lecture 16: Operating Leverage, Variable Cost, Capital Structure
20 Jan 2018
School
Professor
Document Summary
The formula for operating leverage is quantity x (price - variable cost per unit) / quantity x (price - variable cost per unit) - fixed operating cost = operating leverage. For example, company a sells 500,000 products for each. It costs sh. 05 per unit to make each product. Company a"s operating leverage is 500,000 x ( - sh. 05) / 500,000 x ( - sh. 05) - Therefore, a 10% revenue increase should result in a 13. 7% increase in operating income (10% x 1. 37 = 13. 7%). What is a "degree of operating leverage - dol" The degree of operating leverage (dol) is a leverage ratio that summarizes the effect a particular amount of operating leverage has on a company"s earnings before interest and taxes (ebit) over a period of time. Operating leverage involves using a large proportion of fixed costs to variable costs in the operations of the company. Breaking down "degree of operating leverage - dol"
