Define the operating leverage effect, Financial Management

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What is the operating leverage effect and what causes it?  What are the potential benefits and negative consequences of high operating leverage?

The phrase operating leverage effect is the phenomenon whereby a small change in sales triggers a comparatively large change in operating income.  It is origin by the existence of fixed operating costs.  The potential advantages are that if sales are rising operating income will increase more quickly.  The negative consequences are that falling sales will cause operating income to fall more rapidly, involving negative values.


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