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

#titleEvaluate alternative hedging strategies, Peak Inc. needs to order Can...

Peak Inc. needs to order Canadian raw materials to use in its production process. The Canadian exporter typically invoices Peak in Canadian dollars. Assume that the current exchang

Determine the term- investment decision, Determine the term- Investment dec...

Determine the term- Investment decision Investment decision is broadly concerned with asset-mix or composition of the assets of a firm. Concern of the financing decision is wit

Sustainable growth rate, You are given the following information for Clapto...

You are given the following information for Clapton Guitars, Inc. Profit margin 6.3% Total Asset turnover 1.6 Total debt ratio 0.44 Payout ratio 35% Calculat

Available bid capacity for a bidder, A vailable bid capacity We saw th...

A vailable bid capacity We saw the criterion that qualifies the bidder. Now we will learn about the bid capacity. There are chances that a bidder might acquire more contrac

Optimal cash model, Optimal Cash Model: Cash Management is a bigger as...

Optimal Cash Model: Cash Management is a bigger aspect that involves range of functions that assist individuals and business to process their payments and receipts in an organ

Offshore pension funds, (b) What are the possible advantages of an offshore...

(b) What are the possible advantages of an offshore pension fund?

Securities and exchange commission (sec), SEC is the Regulatory body for...

SEC is the Regulatory body for investor protection in the United States which is created through the Securities Exchange Act of 1934.

Qualification criteria for a bidder of contract, Q ualification criteria ...

Q ualification criteria We discussed how to prepare the bid documents. Let us now see what criteria should be considered to qualify a bidder. You will have to open bidding

Clemson software, Clemson Software is considering a latest project whose da...

Clemson Software is considering a latest project whose data are given below.  The needed equipment has a 3-year tax life, after which it will be worthless,and it will be depreciate

On-the-run treasury issues and selected off-the-run treasury, The wid...

The wide gap between maturities poses problems in using the on-the-run issues, especially after five years. Some dealers and vendors use selected off-the-run Trea

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