![]() ![]() In effect, companies with high operating leverage take on the risk of failing to produce enough revenue to profit, but more profits are brought in beyond the break-even point.Ĭompanies with business models characterized as having high operating leverage can profit more from each incremental dollar of revenue generated beyond the break-even point. The greater the percentage of total costs that are fixed in nature, the more revenue must be brought in before the company can reach its break-even point and start generating profits. sales price per unit minus variable cost per unit.īreak-Even Point (BEP) = Fixed Costs ÷ Contribution Margin The break-even point formula consists of dividing a company’s fixed costs by its contribution margin, i.e. the inflection point where a company turns a profit. The break-even point is the required output level for a company’s sales to equal its total costs, i.e. The downside to operating leverage is if customer demand and sales underperform, the company has limited areas for cost-cutting since regardless of performance, the company must continue paying its costs that are fixed.
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