The correct answer is: C. Operating leverage.
Operating leverage is a measure of how a company’s operating costs react 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 operating income. 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 operating income.
Financial leverage is a measure of how a company’s financial structure affects its earnings per share (EPS). A company with high financial leverage has a high proportion of debt, so a small change in earnings before interest and taxes (EBIT) can lead to a large change in EPS. A company with low financial leverage has a low proportion of debt, so a small change in EBIT can lead to a small change in EPS.
Combined leverage is a measure of how a company’s operating and financial leverage affect its EPS. A company with high combined leverage has a high proportion of both fixed costs and debt, so a small change in sales can lead to a large change in EPS. A company with low combined leverage has a low proportion of both fixed costs and debt, so a small change in sales can lead to a small change in EPS.
In conclusion, the relationship between change in sales and change in EPS is measured by operating leverage.