When a firm has fixed operating costs, operating leverage is present. In that case, an increase in sales results in a more-than-proportional increase in EBIT, and a decrease in sales results in a more-than-proportional decrease in EBIT.

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This is because fixed operating costs remain constant regardless of changes in sales, so as sales increase, the proportion of fixed costs to total costs decreases, leading to a higher EBIT margin. Conversely, as sales decrease, the proportion of fixed costs to total costs increases, leading to a lower EBIT margin. This phenomenon is known as operating leverage.

When a Firm Has Fixed Operating Costs, Operating Leverage Is