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Unformatted text preview: greater affect on operating income. This means they have a higher risk but also have a greater potential for reward if they increase sales. On the other hand, a company that has a lower operating leverage has lower levels of fixed costs and higher levels of variable costs. This type of company has little affect on operating income when sales change. Therefore they have a lower level of risk but do have a lower potential benefit for increasing sales. The operating leverage factor is determined by taking sales revenue, subtracting variable costs to get the contribution margin, and dividing the result by the operating income. This tells companies by what percentage operating income will change from a 1% change in sales volume. References: Bamber, L., K. Braun, and W. Harrison. 2007. Managerial Accounting . Upper Saddle River, NJ: Prentice Hall...
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- Spring '08
- Operating Leverage