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Hello sir
what is the formula for Operational gearing or operating gearing?
fixed costs/variable costs
or
Contribution/PBIT ? I saw this one used in the past paper.
thanks
Both are used. I find that the first is easier to interpret: a simple comparison of fixed and variable costs. The higher, the greater the operational gearing.
The bottom one is roughly equivalent to:
Contribution/(Contribution – Fixed costs). As fixed costs rise, this ratio will rise too, so a high value means relatively high fixed costs.
I’ve also see it measured as Fixed costs/total costs.
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