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Chapter 14. Planning Profits > Analyzing Operating Leverage

Analyzing Operating Leverage

Operating leverage is the extent to which a firm's operations involve fixed operating expenses. Managers can define the degree of operating leverage they want the firm to incur, based on the choices they make regarding fixed expenses. They can, for example, acquire new equipment that increases automation and reduces variable labor expenses. Alternatively, they can choose to maintain their variable labor expenses. Other things being equal, the more automated equipment a firm acquires through capital investment, the higher its operating leverage will be.

Case Study: Business Forms

You own a small company that prints business forms such as invoices, letterheads, envelopes, and business cards. At present, your variable operating costs are $0.03 per card to print a box of 500 business cards, which you sell for $35.


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