What does operating leverage measure?

Operating leverage is a financial concept that measures the sensitivity of a company's operating income (or EBIT) to changes in sales revenue. It essentially assesses how a change in sales volume will impact profitability, reflecting the degree to which a company utilizes fixed costs in its operations.

When a company has high operating leverage, it indicates that a significant proportion of its costs are fixed rather than variable. This means that if the company experiences an increase in sales, the additional revenue will largely contribute to a higher growth in operating income, as most costs remain constant regardless of changes in sales. On the other hand, if sales decrease, those fixed costs can negatively impact profitability significantly.

Thus, choosing the option that reflects the impact of revenue growth on operating income growth accurately describes what operating leverage measures. It encapsulates the core principle of how fixed costs amplify changes in sales into proportionately larger changes in profitability.