Which of the following best defines operating leverage (OL)?

The definition of operating leverage (OL) is indeed best captured by the measure of profit change resulting from a revenue change. Operating leverage is a financial concept that describes how a change in sales volume will affect profits due to the presence of fixed costs in a company’s cost structure. When a company has high operating leverage, it means that a small percentage increase in sales can lead to a much larger percentage increase in profits.

This relationship occurs because fixed costs remain constant regardless of sales volume, while variable costs may fluctuate with production. Therefore, when sales increase, the additional revenue contributes significantly to profit, as only variable costs need to be accounted for against that revenue. Conversely, when sales decline, profits can drop sharply due to these fixed costs.

In contrast, the other definitions do not capture the specific essence of operating leverage. The ratio reflecting fixed costs relative to total costs indicates the cost structure, but it does not directly explain the impact on profits. The indicator of the number of purchase orders processed is more associated with operational efficiency rather than the concept of leverage. Lastly, the calculation of total costs divided by revenues generated provides some insights into overall profitability but does not specifically relate to how changes in revenue influence profit in the context of fixed versus variable costs. Thus,