What does operating leverage mean? It means that a company has large amounts of fixed costs.
This can either be good or bad, depending on the circumstances. Fixed costs are those that do not change with the level of production, such as rent and salaries.
The more fixed costs a company has, the higher their operating leverage will be because they have to spend less for each additional unit they produce. So, what are the advantages of a company with high operating leverage?
Operating leverage means that any additional sales will generally result in larger profit margins.
This is because fixed costs account for such a large part of total cost and do not change as production rises or falls.
The more output you produce, the higher your profitability margin becomes. High operating leverage also allows firms to handle sudden shocks better than low-leverage companies can.,
Low operational leves allow some companies to survive while others go under when faced with sudden changes in either input prices or demand levels.
For example, petrol retailers have been impacted by increased fuel price volatility over recent years due to increased international oil prices. As these increases were felt across all countries where they operated worldwide