Operating Leverage
Operating Leverage refers to the degree to which a company's fixed costs contribute to its overall cost structure. When a company has high operating leverage, it means that a large portion of its costs are fixed, such as rent, salaries, and equipment. This can lead to greater profitability when sales are increasing, as the fixed costs are spread out over a larger revenue base. However, it can also magnify losses when sales are decreasing, as the fixed costs remain the same regardless of sales volume.