What does operating leverage measure?
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.
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