How does a company’s operating leverage effect its profitability? 200 words
Expert Answer
Operating leverage:
Operating leverage reflects the relationship between variable and fixed costs in a company’s cost structure.
High operating leverage:
Means large proportion of the costs are fixed costs and it implies that the lower proportion are variable costs.
Low Operating Leverage:
Means lower proportion of the costs are fixed costs and the larger proportion are variable costs.
Operating leverage effect on companies profitability
1. Lets assume a company with high operating leverage which means that the company has higher fixed costs and lower variable costs.
***[Lower variable cost means higher contribution margin]
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