The correct answer is: A. Fixed Cost of Production.
Operating leverage is a measure of how a company’s operating income changes in response to a change in sales. A company with high operating leverage has a high proportion of fixed costs, which means that a small change in sales can lead to a large change in operating income. A company with low operating leverage has a low proportion of fixed costs, which means that a small change in sales can lead to a small change in operating income.
Fixed costs are costs that do not change in the short run, regardless of the level of production. Examples of fixed costs include rent, salaries, and depreciation. Variable costs are costs that change in proportion to the level of production. Examples of variable costs include raw materials and labor costs.
Operating leverage is important because it can affect a company’s profitability. A company with high operating leverage is more profitable when sales are high, but it is also more vulnerable to losses when sales are low. A company with low operating leverage is less profitable when sales are high, but it is also less vulnerable to losses when sales are low.
Here is a brief explanation of each option:
- Option A: Fixed Cost of Production. Fixed costs are costs that do not change in the short run, regardless of the level of production. Examples of fixed costs include rent, salaries, and depreciation. Fixed costs are the main driver of operating leverage. When a company has a high proportion of fixed costs, a small change in sales can lead to a large change in operating income.
- Option B: Fixed Interest Cost. Fixed interest costs are the costs of borrowing money. They are typically paid on a monthly or annual basis, and they do not change in the short run, regardless of the level of production. Fixed interest costs are not a major driver of operating leverage.
- Option C: Variable Cost. Variable costs are costs that change in proportion to the level of production. Examples of variable costs include raw materials and labor costs. Variable costs do not affect operating leverage.
- Option D: None of the above. This option is incorrect. Operating leverage is caused by fixed costs, not variable costs.