Which of the following statements regarding “operating leverage” is incorrect ?

Question

Which of the following statements regarding “operating leverage” is incorrect?

A. Operating leverage comes from the firm’s expenses/costs that are fixed regardless of its sales or profits.

B. The higher the fixed financing costs relative to variable costs, the greater the operating leverage.

C. With high operating leverage the firm’s operating income changes sensitively to even small changes in sales.

D. Businesses like movie theaters, airlines, hotels, and amusement parks are generally known to have high operating leverage.

Explanation / Answer

Option A is wrong

DOL = % change in EBIT / % change in sales

or

(Sales - variable cots) / (Sales - variable cots- Fixed costs)

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