How can degree of operating leverage used for determining the capital structure?
Answers
Operating leverage is a system which is used for calculating profit and loss.
Operating leverage money is mixed up with the capital structure's money for equity. It is maintained by the firm. Some time this amount comes to either profit or loss. Leverage is used in the firm to access the money of investors and operators. It is very risky some times because it comes many times with loss.
Answer:
Operating leverage is associated with investment activities of firm.It is concerned with relationship between firms revenue and its earning before earning and taxes.The cost structure of a firm helps to determine the operating leverage.It is cost accounting formula which measures the firms capability of increasing operating income by increasing revenue.
Explanation
The higher the proportion of fixed operating costs to the total operating costs in the cost structure of a firm, the higher is the degree of operating leverage. Degree of operating leverage enables us to measure the business risk associated with the firm.
A company with high operating leverage, has a large proportion of fixed costs—which means that a big increase in sales can lead to great changes in profits. A company with low operating leverage has a large proportion of variable costs—which means that it earns a smaller profit on each sale, but does not have to increase sales as much to cover its lower fixed costs.