Finance and accounting
Operating leverage
How much profit swings when revenue changes, because of fixed costs.
Last reviewedWhat does Operating leverage mean?
A business with a high share of fixed costs has high operating leverage: when revenue rises, profit rises faster in percentage terms, and when revenue falls, profit falls faster. Airlines and software companies are examples. It explains why a small drop in volume can cause a large drop in profit.
Where does it come up in case interview prep?
- Cost structures, margins and capital intensity across industriesLesson in How industries work: the toolkit
- Fixed and variable costs, operating leverage, and unit economicsLesson in Business basics for non-business learners
- How hotels and travel companies make moneyLesson in Hotels and travel
- RevPAR and hotel economicsLesson in Hotels and travel
- How airlines, airports, and lessors make moneyLesson in Airlines, airports, and aircraft leasing
- Declining industry and turnaroundLesson
- School and edtech unit economicsLesson in Education and edtech
- Chip and data center economics: utilization, yield, and powerLesson in Semiconductors, electronics, and data centers
Related terms
- Fixed costA cost that stays the same when volume changes, within a normal range.
- BreakevenThe volume or revenue at which profit is exactly zero.
- ProfitThe money left over after costs. Revenue minus cost.
- RevenueMoney earned from sales, before costs.
- CostWhat it takes to make and sell the product in a period.
- Variable costA cost that rises and falls with how much you make.
- Semi-variable costA cost with a fixed part and a part that moves with volume.
- Step costA cost that is flat over a range, then jumps.