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Concept Introduction:
Operating leverage can be defined as ability of firm to use fixed costs to generate better returns.
Variable expenses are associated with the amount of goods produced or services provided. These vary directly with the production level i.e. company's variable cost increases as the production increases and vice-a-versa.
Fixed expenses do not vary with the level of production. They do not change with the amount of goods or services a company produces. They remain same even if the company does not produce any product or provide any service during an accounting period.
Requirement a:
Risks associated with operating leverage
Concept Introduction:
Operating leverage can be defined as ability of firm to use fixed costs to generate better returns.
Financial leverage can be defined as ability of firm to increase better returns and reduce cost of firm by paying lesser taxes.
Variable expenses are associated with the amount of goods produced or services provided. These vary directly with the production level i.e. company's variable cost increases as the production increases and vice-a-versa.
Fixed expenses do not vary with the level of production. They do not change with the amount of goods or services a company produces. They remain same even if the company does not produce any product or provide any service during an accounting period.
Requirement b:
Similarities and differences between operating and financial leverage
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Chapter 12 Solutions
Accounting: What the Numbers Mean
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