Operating leverage is defined as the use of fixed operating costs to magnify the effects of changes in sales on a firm's earnings before interest and taxes.

Question

Quizplus · Accepted Answer

This is the correct definition of operating leverage. Fixed operating costs, such as rent or salaries, do not change with changes in sales volume. This means that as sales increase, the fixed costs are spread over a larger number of units, leading to an increase in earnings before interest and taxes (EBIT). Similarly, as sales decrease, the fixed costs are spread over a smaller number of units, leading to a decrease in EBIT.

Operating Leverage Is Defined as the Use of Fixed Operating