Question

Which of the following is a key determinant of operating leverage?

a. Level of debt.

b. Physical location of production facilities.

c. Cost of debt.

d. Technology.

e. Capital structure.

Answer 1

Answer:

Correct answer is:

d. Technology.

Explanation:

DOL = (Sales − Variable Costs) / (Sales − Variable Costs − Fixed operating Costs)

Operating leverage is extent of fixed operating costs (depreciation, rent, supervisor salaries etc) that are used in firm's operations.

Technology is key determinant which can influence fixed cost, productivity and also contribution.  

Hence option d is correct.

Level of debt, cost of debt and capital structure are determinants for degree of financial leverage. Hence options a, c and e are incorrect.

Physical location of production facilities may influence overall cost and hence is not most appropriate option.