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Chapter 18

Operating gearing

Operating gearing is a measure of the extent to which a firm’s operating
costs are fixed rather than variable as this affects the level of business
risk in the firm.

Operating gearing can be measured as:

Fixed costs Fixed costs % change in EBIT
––––––––––– or ––––––––– or ––––––––––––––––

Variable costs Total costs % change in revenue

The higher the proportion of fixed costs the higher the operating gearing and the
riskier the EBIT.

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