What does operating leverage measure?

Operating leverage measures how sensitive a firm's net operating income (NOI) is to changes in sales. It reflects the proportion of fixed costs in a company's cost structure. When a company has a high degree of operating leverage, a small change in sales can lead to a large change in operating income, indicating a higher risk and potential for profit.

This concept is critical for managers and investors, as it helps assess how fluctuations in sales volume can significantly impact profitability. A firm with high operating leverage will see more significant changes in operating income in response to sales changes compared to a firm with lower operating leverage. Understanding this sensitivity helps businesses make informed decisions about pricing, scaling operations, and managing costs effectively.

The other options touch on relevant concepts, but they do not capture the essence of what operating leverage specifically assesses. Operating leverage is fundamentally about the relationship between sales changes and their direct impact on net operating income.