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Hello Sir,
Hopefully u will have good supper 😉
In part of measures of operating,
Operating Gearing is contribution over operating profit.One of the options is wriiten that ” Co. Is prefering higher rate of operating gearing if sales volume increase”
I noted down all u spoke while having listened to ur lecture sir.
U said the greater the operating gearing
More risky and more change in profit.Yes based on that, when more sales volume, higher operating gearing is better.
However, in fomula, increase in contribution and unchange in operating profit also increase operating gearing cuz of high Fixed cost.
In this case, the company would not prefer higher level of operating gearing.What am i wrong sir?
Thanks to u, last year i passed F5.
I heartily appreciate it Sir.
Congratulations on passing F5 🙂
There are several ways of measuring operating gearing, but higher operating gearing always means having more fixed costs as against variable costs.
The more costs are fixed, then as sales volume increases the profit will increase more, but as sales volume falls then the profit will decrease more (I illustrate this with an example in the lecture).
So higher gearing is ‘good’ if sales volume increases, and ‘bad’ if sales volume falls. It is more risky simply because we obviously do not know what will happen to sales volume in the future.
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