CA Inter P6 · Chapter 6 · Question 5 of 9
Operating leverage arises because of:
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: D) Fixed operating costs in the cost structure
Explanation
Operating leverage measures how sensitive EBIT is to changes in sales. It exists because fixed operating costs do not change with output, so a change in sales has a more than proportionate effect on EBIT. Fixed financial charges such as interest and preference dividend cause financial leverage.
More Financing Decisions – Leverages MCQs
- Q7When a firm operates exactly at its operating break-even point, its degree of operating leverage is:
- Q8Nandini Ltd has a contribution of ₹ 20,00,000 and a degree of operating leverage of 2.5. Its fixed operating costs are:
- Q9A firm with a high degree of operating leverage and a high degree of financial leverage is best described as:
- Q1Annual sales of Mehta Castings are ₹ 40,00,000, variable costs are 60% of sales and fixed operating costs are ₹ 6,00,000. The degree of…
- Q2A company has EBIT of ₹ 10,00,000, debenture interest of ₹ 2,50,000 and preference dividend of ₹ 1,40,000. The tax rate is 30%. The degree…