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Sep / Dec 2021 – question 1 – part c. The formula of operating gearing = Contribution / PBIT. But the study text, operating gearing = Fixed cost / Variable costs. What is the difference ?
Contribution / PBIT = (Revenue – VC)/(Revenue – VC – FC)
I find that a little hard to interpret, although as FC increase this decreases)
FC/VC…..Higher means a greater proportion of FC but the interpretation is easy.
I would use the second method and it is perfectly acceptable in the exam.
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