Managerial Accounting for Managers

Managerial Accounting for Managers
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Managerial Accounting for Managers
Operating leverage refers to the extent to which a firm's operating income reacts to a particular change in sales (Weygandt et al., 2018). It is a measure of sensitivity based on the cost structure of a firm. High operating leverage means that when sales increase by a small percentage, there will be a much larger percentage increase in the level of net income. According to Weygandt et al. (2018), when the sales revenue of a firm is increasing, high operating leverage shows profits rising rapidly, meaning it is a good thing. This is because high operating leverage means a company has more fixed assets to support business operations (Warren et al., 2016). On the other hand, declining sales with high operating leverage can have devastating effects.
Managerial decisions that involve broad changes such as introducing a new product line and launching a new promoti...