operating leverage

Definition

Extent to which a firm commits itself to high levels of fixed operating costs (which vary with time, such as insurance, rent, salaries but not interest) as compared with the levels of variable costs (which vary with volume, such as for energy, labor, material). Firms with high operating leverage have high breakeven points but (when the breakeven point is crossed) they show a greater increase in operating income with every increase in sales revenue (and greater losses with every drop in sales revenue) in comparison with firms with low operating leverage. Also called operation gearing, it is one of the major components of operating risk. See also financial leverage and investment leverage.