OPERATING LEVERAGE

Operating leverage is a measure of variable costs in a firm's overall cost structure

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Degree of operating leverage is risk measure, and calculates the % change in operating income due to change in sales.

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The higher the % of variable costs within a firm's overall cost structure, the greater the degree of operating leverage.

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A rise in operating leverage adds to the business risk exposure of a firm.

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If the degree of operating leverage is 2, there will be an increase of 20% in operating income if revenues rise by 10%.

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