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The degree of operating leverage is the ratio of the relative change in EBIT brought about by a relative change in fixed costs.
Operating Leverage
A measure of how revenue growth translates into growth in operating income, indicating the proportion of fixed to variable costs.
Fixed Costs
Costs that do not fluctuate with changes in production level or sales volume, such as rent, salaries, and insurance.
EBIT
Earnings Before Interest and Taxes, also known as EBIT, is a way to evaluate a company's profit without considering tax and interest expenses.
- Recognize the distinct impacts of operating and financial leverage on business risk.
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Learning Objectives
- Recognize the distinct impacts of operating and financial leverage on business risk.
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