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CS Executive · Corporate Accounting and Financial Management · Capital Structure

Operating leverage arises primarily because of the presence of which of the following in a firm's cost structure?

Operating leverage arises from fixed operating costs. Since these costs stay constant as sales change, a small percentage change in sales leads to a larger percentage change in EBIT. Interest and preference dividend create financial leverage, not operating leverage.

  1. AFixed operating costsCorrect
  2. BInterest on debentures
  3. CPreference dividend
  4. DCorporate tax

Explanation

Operating leverage exists because fixed operating costs do not change with sales, so a change in sales produces a larger percentage change in EBIT. Interest and preference dividend relate to financial leverage, and tax is not a source of either leverage.

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