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operating gearing

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FM Exams › operating gearing

  • This topic has 1 reply, 2 voices, and was last updated 9 years ago by John Moffat.
Viewing 2 posts - 1 through 2 (of 2 total)
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  • February 9, 2016 at 2:30 pm #299830
    mansoor
    Participant
    • Topics: 424
    • Replies: 542
    • ☆☆☆☆

    good evening

    2 firms have the following cost structures:

    Sales ——————- 5——–5
    variable costs———(3)——-(1)
    fixed costs ————(1)——-(3)
    EBIT——————–1———-1

    what is the level of operating gearing in each.

    there are 3 ways to calculate op. gearing. and each gives a different answer. which one to use??

    fixed costs/variable costs==================1/3=======3/1
    fixed costs/total costs=====================1/4=======3/4

    the answer is using fixed/total.

    please explain

    thank u

    February 9, 2016 at 3:26 pm #299834
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54718
    • ☆☆☆☆☆

    You can use either – there is no standard measure of operating gearing.

    If it is in Section A of the exam then the examiner would have to define which measure to use.

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