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Example of Operating Leverage

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Which of the following choices is the best example of how a firm can use operating leverage to increase its earnings before interest and taxes?
a. Issue new bonds to repurchase common stock.
b. Toughen credit standards to improve the collection of accounts receivable.
c. Purchase inventory in larger quantities.
d. Install an ATM (automated teller machine) instead of hiring a new teller.

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Solution Summary

This solution defines and gives an example of the use of operating leverage.

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Investopedia (http://www.investopedia.com/terms/o/operatingleverage.asp) explains defines "operating leverage" as "[a] business that has a higher proportion of fixed costs and a lower proportion of variable costs is said to have used more operating leverage. Those ...

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