Asked by Jenna Grace Milionis on Jul 29, 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
A measure of how sensitive a company's operating income is to changes in revenue, indicating the degree to which fixed costs are utilized.
- Comprehend and determine the role of operating leverage in influencing a firm's profitability relative to variations in sales.
Verified Answer
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Nayari CardenasAug 04, 2024
Final Answer :
Operating leverage is the relationship between a company's contribution margin and its income from operations. 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 calculate how a change in sales will impact profits, multiply the anticipated change in sales by the operating leverage. Thus, the higher a company's operating leverage, the larger the anticipated increase in profits from a change in sales.
Learning Objectives
- Comprehend and determine the role of operating leverage in influencing a firm's profitability relative to variations in sales.