The correct answer is: A. Contribution/EBIT
Operating leverage is a measure of how a company’s operating income (EBIT) changes in response to changes in sales. It is calculated by dividing contribution margin by EBIT.
Contribution margin is the amount of revenue that remains after deducting variable costs. EBIT is earnings before interest and taxes.
A high operating leverage means that a small change in sales can lead to a large change in EBIT. This is because a company with high operating leverage has a large proportion of fixed costs. When sales increase, these fixed costs do not change, so the company’s EBIT increases by a larger amount than the increase in sales.
A low operating leverage means that a small change in sales can lead to a small change in EBIT. This is because a company with low operating leverage has a small proportion of fixed costs. When sales increase, these fixed costs do not change, so the company’s EBIT increases by a smaller amount than the increase in sales.
Operating leverage can be a good thing or a bad thing, depending on the situation. A high operating leverage can be good when sales are increasing, because it means that the company’s EBIT will increase by a large amount. However, a high operating leverage can be bad when sales are decreasing, because it means that the company’s EBIT will decrease by a large amount.
Here is a brief explanation of each option:
- Option A: Contribution/EBIT is the correct answer. This is the most common way to calculate operating leverage.
- Option B: EBT/Contribution is not a valid expression for operating leverage. EBT is earnings before taxes, which is not the same as EBIT.
- Option C: Contribution/EAT is not a valid expression for operating leverage. EAT is earnings after taxes, which is not the same as EBIT.
- Option D: Contribution/Quantity is not a valid expression for operating leverage. Quantity is not a financial measure.