What is meant by the term operating

leverage$?$

How is operating leverage relevant to$$ cost$-$volume$-$profit analysis?

Question content area bottom

Part $1$

Operating leverage measures how changes in

$$

$$

administrative costs

employee salaries

fixed costs

sales volume

variable costs

will cause a change in the$$ company's profits. Operating leverage is relevant to$$ cost$-$volume$-$profit analysis because it

$$

$$

gives companies an idea if fixed costs are causing profit to decrease.

helps the analyst identify whether the assumptions used are realistic.

provides managers a guideline for the bonuses to provide to employees.

If a company has a

$$

$$

high

low

degree of operating$$ leverage, the fixed costs are$$ higher, which means the company is susceptible to

$$

$$

less risk

more risk

if changes occur in either the$$ company's sales or its contribution margin.