In fact, operating leverage occurs when a firm has fixed costs that need to be met regardless of the change in sales volume. If the semi-variable or semi-fixed costs can be apportioned appropriately into variable and fixed components, then the costs of the firm remain of two categories: fixed and variable. This means that they are fixed up to a certain sales volume, varying to higher levels when production and sales volume increase. Semi-variable or semi-fixed costs are partly variable and partly fixed. Normally, the operating cost of an enterprise falls into one of three categories:įixed costs do not vary with the volume of sales, whereas variable costs vary directly with sales volume. Whether an enterprise has fixed operating expenses in its income is the factor that determines operating leverage. Operating leverage is also calculated as a ratio of contribution to salesįormula for Operating Leverage Operating Leverage: Explanation. ![]() ![]()
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