Question

2. Higher OL is related to the use of higher
(a) Debt
(C) Fixed Cost
(b) Equity
(d) Variable Cost​

Answer 1

Fixed Cost

Explanation:

Higher OL is related to the use of higher Fixed Cost.

Operating Leverage (OL) measures the degree to which a business venture incurs operating income by increasing revenue.

It is a composition of fixed and variable cost. It is used to calculate cost-accounting formula:

Operating Leverage = $\frac{Fixed Cost}{Total Cost}$ or $\frac{Fixed Cost }{Fixed Cost + Variable Cost}$

It is a financial efficiency ratio.

If the variable cost is high then the fixed cost of the company, then it is said to be less leverage situation. On the other hand, if the fixed cost is higher than the variable cost, then it is said to be high leverage situation.