14. Planning Profits

The concepts of operating leverage and financial leverage are key to understanding how a company will fare in fluctuating market conditions.

A company is said to be leveraged when it incurs either fixed operating costs, referred to as operating leverage, or fixed capital costs, referred to as financial leverage.

A company’s degree of operating leverage is the extent to which its operations involve fixed operating expenses such as the following costs:

• Fixed manufacturing costs such as equipment leases

• Fixed selling costs such as the salaries of sales support staff

• Fixed administrative costs ...

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