Answers:
The operating leverage takes place when a change in revenue produces a greater change in Earnings Before Interest and Taxes (EBIT). It indicates the impact of changes in sales on operating income. A firm with a high operating leverage has a relatively greater effect on EBIT for small changes in sales. A small rise in sales may enhance profits considerably, while a small decline in sales may reduce and even wipe out the EBIT
Operating leverage arises due to the presence of fixed operating expenses in the firm’s income flows. It has a close relationship to business risk. Operating leverage affects business risk factors, which can be viewed as the uncertainty inherent in estimates of future operating income.