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Operational gearing

ZZainb6y ago
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
kengarrettkengarrettTutor6y ago#1
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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