Markets · 6 pages · 12 min
How operating leverage makes profits swing
When costs stay fixed as sales change, profit moves more sharply than revenue does.
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From the opening
Operating leverage is the effect of fixed operating costs on profit when revenue rises or falls. Because those costs do not shrink just because fewer units sold, a change in sales produces a wider swing in operating profit than the sales change alone would suggest. The opening covers fixed costs do not flex, volume swings the profit, and upside and downside match.
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Inside
- Fixed costs do not flex
- Volume swings the profit
- Upside and downside match
- Debt leverage is a cousin
- Where the idea stops applying
- A distinction worth keeping
Sources
- Fixed versus variable operating costs
- Degree of operating leverage concept