Asked by Gabriel Matar on May 03, 2024
Verified
Define operating leverage. Explain the relationship between a company's operating leverage and how a change in sales is expected to impact profits.
Operating Leverage
An indicator of the extent to which increases in sales revenue result in an increase in operating profit, showing the level of fixed expenses within a business's cost composition.
Sales Impact
The effect of marketing and sales activities on the volume or value of product sales.
- Comprehend the principle of operating leverage and its influence on corporate earnings as a reaction to fluctuations in sales.
Verified Answer
BS
Bailey SchleimerMay 04, 2024
Final Answer :
Operating leverage is the relationship between a company's contribution margin and its operating income. Companies with a high level of fixed costs have a high operating leverage, and companies with low fixed costs have a low operating leverage.To determine how a change in sales will impact operating income, you must multiply the anticipated percentage change in sales by the operating leverage. Thus, the higher a company's operating leverage, the larger the anticipated increase in operating income from a change in sales.
Learning Objectives
- Comprehend the principle of operating leverage and its influence on corporate earnings as a reaction to fluctuations in sales.