Category Archives: OPERATING FINANCIAL AND COMBINED LEVERAGE

Alternative Definition of Operating Leverage (Table)

EBIT for Various Sales Volume TABLE Applying Equation 1 + 1, DOL = 1. Since the quotient is 1. there is no operating leverage. Since operating leverage (magnifying the effects of a change in sales) can be favorable or unfavorable, higher levels of risk are attached to higher degrees of leverage. Since DOL depends on fixed operating costs, it logically follows that the larger the fixed operating cost, the highe

Alternative Definition of Operating Leverage

Alternative Definition of Operating Leverage Operating leverage can also be defined and illustrated in another way. This is a more precise measurement in terms of degree of operating leverage (DOL). The DOL measures in quantitative terms the extent or degree of operating leverage. When proportionate change in EBIT as a result of a given change in sales is more than the proportionate change in sales, operating

Interpretation

Interpretation In case 2, 16.7 per cent decrease in sales volume (from 300 units to 250 units) leads to 100 per cent decline in the EBIT (from Rs 1,000 to zero). On the other hand, a 16.7 per cent increase In the sales level in case 1 (from 300 units to 350 units) results in 100 per cent increase In EBIT (from Rs 1,000 to Rs 2,000). The two illustrations Tables clearly show that when a firm has fixed operating 

OPERATING LEVERAGE

OPERATING LEVERAGE Operating leverage results from the existence of fixed operating expenses in the firm’s income firm. The operating costs of a firm fall into three categories. (i) fixed costs which may be defined those which do not vary with sales volume, they are a function of time and are typically contractual; they must be paid regardless of the amount of revenues available; (ii) variable costs vary di

OPERATING FINANCIAL AND COMBINED LEVERAGE

OPERATING FINANCIAL AND COMBINED LEVERAGE INTRODUCTION The purpose of this Chapter is to set forth a framework for the financing decision of a firm. It discusses the principles and types of leverage. As mentioned earlier, a firm can make use of different sources of financing whose costs are different. These sources may be for purposes of exposition, classified into those which carry a fixed rate of return and