[Tylerr]

Hello all,

I was hoping that someone may be able to give me a clearer definition on what operating leverage is and DOL.

I know that high fixed costs means a company has high leverage – how is this so?

Also, how does contribution margin divided by net income show us how the magnification a change in sales makes in profit..and how does that relate to leverage and fixed costs? After all if sales increase, won’t contribution margin?

I really appreciate any help. I’m actually taking cost accounting now, but in this class we are often cook-booked. Taught what an equation looks like and how to get some answers from it. Thanky ou!

[NYCaccountant]

Basically if fixed cost makes up a substantial portion of your operating income, than you much more likely to be screwed! Hence the point you are are highly leveraged. Basically the more fixed costs you have, the less flexible you are, which makes sense. Variable costs are different in that they typically depend on production levels and are a fixed percent of sales, so the contribution margin per unit does not change.

FAR - 93
REG - 87
BEC - 84!!!!
AUD - 99!!!!!! CPA exam complete.

[NYCaccountant]

Basically if fixed cost makes up a substantial portion of your operating income, than you much more likely to be screwed! Hence the point you are are highly leveraged. Basically the more fixed costs you have, the less flexible you are, which makes sense. Variable costs are different in that they typically depend on production levels and are a fixed percent of sales, so the contribution margin per unit does not change.

FAR - 93
REG - 87
BEC - 84!!!!
AUD - 99!!!!!! CPA exam complete.

[Author]

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