1)What information does the degree of operating leverage provide to management of a firm?

2) How do we define cost elasticity? Is there any relationship between cost elasticity and economies of scale? Show and explain why.

Operating leverage is a tool that shows the effect on the operating Income with respect to the change in sales.

Degree of Operating leverage = Changes In the operating income\ Change in the Sales

The degree of the Operating leverage provides the following information to the management of the firm:

1) The company?s breakeven point is calculated through the Operating leverage.

2) If the degree of Operating Leverage is high that means it earns a big profit on every sale so it can increase the sales simultaneously.

3) If the degree of Operating Leverage is low that means it earns a small profit on every sale.

4) It can also be used so as to determine the risk in the operation of the firm.

5) It also helps to compare whether the firm has exceeded the variable cost than the fixed costs.

Cost Elasticity explains the change in cost with respect to the change in output

That is;

Percentage Change in Total cost \ Percentage changes Total Output.

The relationship between Cost Elasticity and Economies of Elasticity is related to each other as when Cost Elasticity is less than 1 it means the economies of scale is there.

As the quantity of the commodity increases it is expected the costs of input i.e. Direct labor, direct and raw material, factory overheads etc. can be decreased or can be kept constant.