What is operating leverage It too is considered a short cut

What is operating leverage? It, too, is considered a short cut. If sales change, it can predict a change in what income statement amount?

Explain in ways for easy understanding

Solution

Operating Leverage helps in measuring how a change in the total revenue will change the operating income of the firm.

In other words, it helps to ascertain the resultant change in operating income due to a change in revenues.

For example: If the operating leverage of a company is 1.5, then a 10% increase in total revenue will increase the operating income of the firm by 15%.