| Operating Leverage |
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The two, Fixed Costs and Variable Costs are the Operating Expenses . The ratio between the two determines how growth in revenue impacts the Operating Margin . If the variable costs are all the operating costs, then the operating margin would be constant as sales grow. A 10% increase in revenue generates a 10% increase in operating income. If, however, fixed costs are high, then a 10% increase in revenue will generate quite a bit more than 10% increase in operating earnings, essentially increasing the Operating Margin . Outsourcing a product or service is a method used to change the ratio of Fixed Costs to Variable Costs in a business. Outsourcing can be used to change the balance of this ratio by offering a move from variable to fixed cost and also by making variable costs more predictable. SEE ALSO EXTERNAL LINKS |
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