Operating leverage = ______.

contribution / EBIT
contribution / EBT
contribution / total expenses
contribution / operating PBT

The correct answer is: A. contribution / EBIT.

Operating leverage is a measure of how a company’s operating costs change in response to changes in sales. It is calculated by dividing contribution margin by earnings before interest and taxes (EBIT).

Contribution margin is the amount of revenue that remains after deducting variable costs. EBIT is earnings before interest and taxes, which is calculated by deducting operating expenses from revenue.

A high operating leverage indicates that a company has a high proportion of fixed costs. This means that a small change in sales can lead to a large change in EBIT. A low operating leverage indicates that a company has a low proportion of fixed costs. This means that a large change in sales can lead to a small change in EBIT.

Operating leverage can be a positive or negative factor for a company. A high operating leverage can be beneficial if sales are increasing, as it can lead to higher profits. However, a high operating leverage can be harmful if sales are decreasing, as it can lead to larger losses.

Here is a brief explanation of each option:

  • Option A: Contribution / EBIT. This is the correct answer. Contribution margin is the amount of revenue that remains after deducting variable costs. EBIT is earnings before interest and taxes, which is calculated by deducting operating expenses from revenue. Operating leverage is a measure of how a company’s operating costs change in response to changes in sales. It is calculated by dividing contribution margin by EBIT.
  • Option B: Contribution / EBT. EBT is earnings before taxes. This is not the correct answer because it does not take into account interest expenses.
  • Option C: Contribution / total expenses. Total expenses is the sum of all of a company’s expenses, including variable and fixed costs. This is not the correct answer because it does not take into account contribution margin.
  • Option D: Contribution / operating PBT. Operating PBT is operating profit before tax. This is not the correct answer because it does not take into account interest expenses.