Question

An increase in the selling price per unit will decrease an organization's operating leverage, assuming sales unit volume doesn't change and there are no other changes in its cost structure. True or False True False

Answer 1

This statement is true.

Operating leverage is a financial efficiency ratio used to measure what percentage of total costs are made up of fixed costs and variable costs in an effort to calculate how well a company uses its fixed costs to generate profit.

This can be explained with the following example;

	Quantity	Sale price	variable cost per unit	Fixed operating cost
1st case	100	10	3	400
After increase in selling price	100	12	3	400
Operating leverage =		Quantity x (sale price per unit - variable cost per unit)
		Quantity x (sale price per unit - variable cost per unit) - fixed operating cost
1st case	Operating leverage =		100 * (10-3)	=	2.33
			100 * (10-3) - 400
After increase in selling price	Operating leverage =		100 * (12-3)	=	1.80
			100 * (12-3) - 400