What does operating leverage measure?

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

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In business, the term "leverage" refers to the amount of debt that a firm has.  The term refers to the idea that the firm is using the debt as a lever to allow it to use a little debt to make large profits.

Operating leverage is a measure of how much of a firm's costs are fixed, as opposed to variable.  A firm has higher operating leverage if many of its costs are fixed.  Fixed costs are costs like machinery--things that cost a certain amount, regardless of how much product a firm produces.  A firm with high operating leverage is in a relatively good position because any increases in its level of production bring it more profits because so many of its costs are fixed.

Please follow the link below for an excellent in-depth discussion of this topic that uses examples.

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