Question

Operating leverage refers to:

Select one: a. the relationship between product mix and costs b. the mix between sales and variable costs. c. the mix between fixed and variable costs. d. the mix between sales and fixed costs.

Answer 1

Answer:

Option c: the mix between fixed and variable costs

Explanation:

Operating leverage refers to the degree to which the operating incomes increase to the change in revenues.

It is calculated as:

Contribution / EBIT

Operating leverage works due to fixed costs. So, operating leverage is a mix between variable and fixed costs.

If fixed costs are high, the operating leverage will also be higher, and vice-versa.

Hence, option 'c' is correct and rest all are incorrect.

In case of any doubt, please feel free to comment.