The degree to which a company's operating income changes in response to changes in sales, determined by the proportion of fixed costs in the cost structure. Higher fixed costs create greater operating leverage.
Developed in the mid-20th century as cost accounting evolved to distinguish between fixed and variable costs. The leverage concept applies because fixed costs create a fulcrum effect - once covered, additional sales flow more directly to profits.
Operating leverage explains why airlines can be incredibly profitable when full but lose money when half-empty, even though the cost of flying the plane is almost the same! It's the secret behind why software companies with high development costs but near-zero marginal costs can achieve such spectacular profit margins.
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