operating leverage investment & finance definition
Occurs
when fixed costs comprise the company’s total costs. As sales increase, the
operating costs are spread across a wider number of units of sale, which
increases the operating margin and, thus, profits. A higher ratio of fixed
costs implies greater operating leverage, as incremental profits are higher
than for a company with lower operating leverage.
See operating leverage in Wall Street Words
The extent to which fixed operating costs magnify changes in sales or revenues into even greater proportionate changes in operating income. For example, a company that substitutes robots or other machinery for laborers also substitutes fixed costs for variable costs and increases its operating leverage. High operating leverage tends to produce volatile earnings. Compare
financial leverage.
Learn more about operating leverage