Explain the term Operating Leverage

Question

Briefly explain the term Operating Leverage?

Answer 1

Operating leverage works on fixed cost and variable costs. It examines both of the costs and it stays in the company that has the maximum proportion of fixed operating cost concerning variable operating costs. The company employs fixed assets in operation of the company or vice versa. The company that is dealing in high operating leverage creates more money from further sales if the company's cost does not increase to produce more sales. Such as the software developing company's cost structure remains fixed and inadequate to the development and marketing cost. It does not matter how many components they sell the cost remain fixed. It assists the investor in dealing with the information on the risk analysis of the company. High operating leverage occasionally assists benefiting companies and sometimes remains susceptible to sharp economic and business cycle swings.