If the sales and P/V ratio of a firm is Rs. 1000 and 80% respectively and the amount of interest paid is Rs. 400, then operating leverage of the firm is:

The correct answer is B.

Operating leverage is a measure of how a firm’s operating income responds to changes in sales. It is calculated by dividing the contribution margin by the operating income.

The contribution margin is the amount of revenue that remains after deducting variable costs. The operating income is the amount of revenue that remains after deducting both variable and fixed costs.

In this case, the sales are Rs. 1000, the P/V ratio is 80%, and the amount of interest paid is Rs. 400. The contribution margin is therefore Rs. 600 (1000 x 0.8). The operating income is Rs. 200 (1000 – 400 – 600).

The operating leverage is therefore 3 (600 / 200).

Option A is incorrect because it is the amount of interest paid. Option C is incorrect because it is the P/V ratio. Option D is incorrect because it is the sales.