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Planning Profits

The concepts of operating leverage and financial leverage are key to understanding how fluctuating market conditions will affect its profitability.

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 a function of its sales, its fixed and its variable 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 such as that ...

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