Operating Leverage and Fluctuations in operating earnings

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• Effect of Operating Leverage on Company's Risk Position

  The operating leverage reflects the extent to which a change in sales affects earnings and a high operating leverage ratio, with a highly elastic product demand, will cause sharp earnings fluctuations.

• Leverage

  Operating leverage affects both EBIT and EPS. More the operating leverage more is the percentage of fixed costs. Thus, the fluctuations in EBIT can be huge with a high amount of operating leverage which translate to large fluctuations in EPS.

• Operating leverage

  How do fixed costs create operating leverage? Operating leverage is concerned with the relative mix of fixed costs and variable costs in an organization. It is sometimes possible to trade off fixed costs for variable costs.

• Degree of operating leverage :sample question

  1.Degree of operating leverage. 2.Degree of financial leverage. 3.Degree of combined leverage. 4.Break-even point in units.

• Operating leverage and financial leverage

  Formula for calculating Operating leverage = Contribution Margin/Earnings before Interest and taxes Financial leverage= Earnings before Interest and taxes/ Earnings before taxes The critical distinction is of nature of risk and cause of risk.

• Thompson Wood Products has credit sales of $2,160,000 and accounts receivable of $288,000. Compute the value of the average collection period.

  Operating leverage is based on the relationship between a firm's sales revenue and its earnings before interest and taxes. Operating leverage arises when an enterprise has a relatively large amount of fixed costs in its total costs.

• How can a company reduce its weighted average cost of capital?

  Operating leverage refers to the sensitivity of earnings before interest and taxes to changes in sales revenue.

• Operating leverage

  Rest are true since a change in operating leverage will change cost structure (variable and fixed costs), higher operating leverage is higher business risk and increases the variability in earnings. The answer is E.

• Degree of operating leverage, degree of financial leverage, combined leverage, break-even point in units

  100242 Degree of operating leverage, degree of financial leverage, combined leverage, break-even point in units A Company manufactures skates.