The correct answer is: B. The effect of the change in EBIT on the EPS of the company.
Operating leverage is a measure of how a company’s operating income (EBIT) changes in response to changes in sales. A company with high operating leverage has a high proportion of fixed costs, so a small change in sales can lead to a large change in EBIT. A company with low operating leverage has a low proportion of fixed costs, so a small change in sales can lead to a small change in EBIT.
EPS is earnings per share, which is calculated by dividing EBIT by the number of shares outstanding. A company with high operating leverage will have higher EPS when sales are high, but lower EPS when sales are low. A company with low operating leverage will have lower EPS when sales are high, but higher EPS when sales are low.
Here is a brief explanation of each option:
A. The effect of the change in the quantity on EBIT. This is not an accurate description of operating leverage. Operating leverage measures the effect of a change in sales on EBIT, not the effect of a change in quantity.
B. The effect of the change in EBIT on the EPS of the company. This is an accurate description of operating leverage. Operating leverage measures how a company’s EBIT changes in response to changes in sales, and EPS is calculated by dividing EBIT by the number of shares outstanding.
C. The effect of the change in output to the EPS of the company. This is not an accurate description of operating leverage. Operating leverage measures the effect of a change in sales on EBIT, not the effect of a change in output.
D. The effect of change in EPS on the output of the company. This is not an accurate description of operating leverage. Operating leverage measures the effect of a change in sales on EBIT, not the effect of a change in EPS.