Final answer:
Operating leverage is the measure of how sensitive net operating income is to a change in sales, and it reflects the business's fixed to variable costs ratio.
Step-by-step explanation:
Operating Leverage:
The measure of how sensitive net operating income is to a given percentage change in sales dollars is known as operating leverage. Option b) Leverage, therefore, is the correct answer to the provided question. Operating leverage can be understood in the context of elasticity, which is a general measure of responsiveness. It represents the degree to which a firm's operating income, or net operating income (NOI), responds to a change in sales.
The concept of elasticity not only applies to market goods and services but also to labor markets, capital markets, and in this case, the operational aspects of a business. Businesses with high operating leverage will experience a more significant impact on NOI for a given change in sales compared to those with low leverage. This is largely because firms with higher operating leverage have a greater proportion of fixed costs relative to variable costs in their cost structure.