Operating leverage measures how sensitive a companys operating income is to changes in sales volume....
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Operating leverage measures how sensitive a companys operating income is to changes in sales volume. This is because Company B has a higher contribution margin and higher fixed costs. The higher fixed costs mean that once the fixed costs are covered, additional sales contribute more significantly to net operating income. The importance is in the following: risk and reward, profit planning, and cost control. They can use operating leverage to identify areas that can improve on profitability.
Operating leverage measures how sensitive a companys operating income is to changes in sales volume. This is because Company B has a higher contribution margin and higher fixed costs. The higher fixed costs mean that once the fixed costs are covered, additional sales contribute more significantly to net operating income.
The importance is in the following: risk and reward, profit planning, and cost control. They can use operating leverage to identify areas that can improve on profitability.
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