Operating leverage or operating leverage is the mechanism by which a company's profit is managed. It is based on the optimization of indicators of the ratio of variable and fixed costs. With the help of the operating leverage, the entrepreneur can predict the change in the amount of profit depending on changes in sales volumes. In addition, the operating lever allows you to define the breakeven point.
The activities of any enterprise are associated with various factors, which can be conditionally divided into:
1. Factors associated with maximizing profits;
2. Factors associated with:
identification of the critical coefficient for the volume of products sold;
the best combination of maximum revenue and maximum costs;
with the division of costs into fixed and variable.
Variable costs include raw materials, fuel or electricity, blanks and consumables, workers' wages, etc. Fixed costs include depreciation deductions, administrative staff salaries, interest on loans and rent, if any, advertising costs, travel expenses, etc.
The operating lever allows:
to solve the issue of increasing the amount of profit by reducing a part of certain costs;
find the optimal combination of fixed and variable costs, which will lead to increased profits; assess the cost recovery and financial stability of the company. That is, operational analysis allows you to establish a direct relationship between costs, profits and production volumes.
More here - https://en.wikipedia.org/wiki/Operating_leverage
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