Operating Leverage

"Operating leverage" and its impact on income volatility at different levels of sales activity
To achieve a higher operating leverage as an entrepreneur, the proprietor's net income must have a reaction to a known variation in sales. Kimmel, Weygandt, and Kieso (2011) stated, “When a company's sales revenue is increasing, high operating leverage is a good thing because it means that profits will increase rapidly” (Chapter 19). Operating leverage can cause devastating costs if the sales take a turn about and begin to decline. Using the operating leverage can leave the company opens for greater loss if sales decreases because of the higher fixed costs incurred through making payments on the equipment that is use to process the business product. Yes, any size increase in sales indicates an enormous yield. This increase only extends from the fixed costs because the company can pay off the equipment, and there's no labor costs, health care costs, or retirement packages. The owner must take into consideration “from this analysis that a cost structure that relies on higher fixed costs, and consequently has higher operating leverage, is necessarily bad” but know when its used cautiously, “operating leverage can add considerably to a company's profitability” (Kimmel, Weygandt, & Kieso, 2011). Profits and growth needs a healthy tension amongst the two entries. Operating leverage is the leverage effect on accounts of all fixed costs other than interest.
Kimmel, P. D., Weygandt, J., & Kieso, D.E. (2011). Accounting: Tools for business decision-making (4th ed.) [University of Phoenix Custom Edition eBook]. : John Wiley & Sons. Retrieved from the University of Phoenix, ACC561 - Accounting website.