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 ...