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Unformatted text preview: if they have both fixed and variable components. Operating leverage is a produced when a small percentage change in revenue produces a proportionately larger percentage change in net income. The higher the proportion of fixed costs to total cost, the greater the operating leverage. To calculate a company’s operating leverage divide contribution margin by net income. The scope of activity over which the definitions of fixed and variable costs apply is called the Relevant Range . A Variable Cost is a cost that in total changes in direct proportion to changes in volume of activity. The concept known as economies of scale says that cost of production can be reduced by taking advantage of opportunities that become available when an operation’s size is increased. Formulas to Review Contribution Margin = Revenue – Variable Costs Operating Leverage = Contribution Margin/Net Income...
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This note was uploaded on 03/31/2011 for the course ACCT 102 taught by Professor Wang during the Spring '11 term at Adelphi.
- Spring '11