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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

What does operating leverage measure, and how is it computed?

To determine

Cost-Volume-Profit Analysis: It is a method followed to analyze the relationship between the sales, costs, and the related profit or loss at various levels of units sold. In other words, it shows the effect of the changes in the cost and the sales volume on the operating income of the company.

To explain: operating leverage and its computation.

Explanation

Operating leverage measures the proportion of fixed cost on the total costs and the extent to which the changes in the sales volume affects the income from operations.

It shows the relationship between the contribution margin and income from operations. Contribution margin is the difference of sales and variable cost. And, the fixed cost is the difference between the contribution margin and the income from operations. Thus,

Thus, a company which has a higher fixed cost and low variable cost, the operating leverage is high. Whereas a company which has a lower fixed cost and high variable cost, the operating leverage is low...

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