Which of the following statements about operating leverage is true?
A) Operating leverage reduces a firm's risk.
B) Operating leverage is the responsiveness of the firm's EBIT to fluctuations in sales.
C) Operating leverage involves the usage of fixed cost financial securities in the operation of a business.
D) Operating leverage is the responsiveness of the firm's EPS to fluctuations in sales.

Question

Quizplus · Accepted Answer

Operating leverage measures the degree to which a firm uses fixed costs in its operating expenses. It is calculated as the ratio of fixed costs to total costs. Operating leverage magnifies the effect of changes in sales on a firm's earnings before interest and taxes (EBIT). Thus, option B is the correct statement, as it defines operating leverage accurately. Options A and D are incorrect, as operating leverage actually increases a firm's risk, and EPS is not directly affected by operating leverage. Option C is also incorrect, as fixed cost financial securities are not related to operating leverage but to financial leverage.

Which of the Following Statements About Operating Leverage Is True