21.2 MARGINAL-ANALYSIS LEVERAGE

Marginal-analysis leverage relates the profit measure to certain other aspects of a firm’s operations or financial situation. When it is concerned with the operating situation, operating leverage is said to exist, and, on the other hand, when it is concerned with the financial situation, it is the fixed-charges leverage that exists, when both types of the leverage exist, it is termed combined leverage. Thus marginal-analysis leverage is of three types. They are as follows:

  1. Operating leverage
  2. Fixed-charges leverage
  3. Combined leverage

21.2.1 Operating Leverage

Operating leverage exists when changes in revenue (sales) produce greater changes in the operating profit. This happens because fixed operating costs constitute ...

Get Fundamentals of Financial Management, Third Edition now with O’Reilly online learning.

O’Reilly members experience live online training, plus books, videos, and digital content from 200+ publishers.