Illustrate the operating leverage, Financial Management

Assignment Help:

Q. Illustrate the Operating Leverage?

Operating Leverage: - The operating leverage perhaps defined as the tendency of the operating profit to differ disproportional with sales. It is said to survive when a firm has to pay fixed cost regardless of volume of output or sales. The firm is supposed to have a high degree of operating leverage if it employs a greater amount of fixed cost and a smaller amount of variable cost. Alternatively a firm will have a low operating leverage when it employs a greater amount of variable cost as well as a smaller amount of fixed cost. Therefore the degree of operating leverage depends upon the amount of fixed element in the cost structure.

Operating leverage in the company is a function of three factors:-

(a) The amount of fixed cost

(b) The contribution margin

(c) The volume of sales

Formulae:-

Operating leverage =    Contribution / Operating profit    or       C/OP

Utility: - The operating leverage point outs the impact of change in sales on operating income. If a firm has a elevated degree of operating leverage small changes in sales will have large effect on operating income. Alternatively the operating profit (EBIT) of such firm will rise at a faster rate than the increase in sales.

Likewise the operating profit of such a firm will suffer a great loss as compared to reduction in its sales.


Related Discussions:- Illustrate the operating leverage

Valuing debt securities, Valuing Debt Securities Securities which promi...

Valuing Debt Securities Securities which promise to pay its investors a stated rate of interest and return principal amount at the maturity date are known as debt securities.

Estimate the total rate of return, Question: Explain: (a) the advant...

Question: Explain: (a) the advantages and disadvantages, to a company, of debt finance over equity finance; (b) the reasons why a company may choose to issue preference s

Report on liquidity and financing, Extent of Financing Required It is ...

Extent of Financing Required It is clear that sales are unsure with low, high and medium estimates of demand. This of itself gives a few uncertainty but the reliability and pr

Statement of total comprehensive income for the year, At 31 July 2010 this ...

At 31 July 2010 this instrument meets the definition of a derivative: Small or no initial investment. Its value is dependent on an underlying economic item; exchange ra

Calculate annual payments into a savings account, Calculate annual payments...

Calculate annual payments into a savings account: Mr. Jones intends to retire in 20 years at the age of 65. As, yet he has not provided for retirement income, and he wants to

Explain about book value weights, Q. Explain about Book Value Weights? ...

Q. Explain about Book Value Weights? Book Value Weights: - Book value weights are calculating form the values taken from the balance sheet. The weight to be assigned to every s

Describe the meaning of financial management, Q. Describe the Meaning of Fi...

Q. Describe the Meaning of Financial Management? Meaning of Financial Management: - Financial management is a vital as well as an integral part of business management. It demot

Inverse floaters, Normally, floater coupon rate moves in the same dir...

Normally, floater coupon rate moves in the same direction as the reference rate. That is, with an increase in the reference rate, the floater coupon rate also increases

Explain the effect of foreigners’ portfolio investments, As the early 1980s...

As the early 1980s, foreign portfolio investors have purchased an important portion of U.S. treasury bond issues. Discuss the short-term and long-term influences of foreigners’ por

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd