The employment of an asset or source of funds for which the first firm has to pay a fixed cost or fixed return may be termed as leverage.

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Operating leverages: is determined by the relationship between firms, sales revenue and its earnings before interest and taxes (EBIT) which are generally called as Operating profits. Operating leverage results from the existence of fixed operating expenses in the firm’s income stream. the operating leverage may be defined as the firm’s ability to use fixed operating cost to magnify the affects of charges In sales on its earnings before interest and taxes.

 

 

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