Operating leverage and production profitability: functional dependence
The paper demonstrates the influence of differentiation between fixed and variable costs on the eventual change in revenue and total costs of an enterprise, as well as the importance of operating analysis, which includes such important indicators as financial safety margin and operating leverage. The work conducts an analysis of the total cost structure and production volumes on the final financial results of an enterprise. The article further emphasizes that the activity of an enterprise with low operating leverage is associated with lower risk, however also with lower financial reward (revenue). The paper also establishes the existence of an inverse relationship between the financial safety margin and the operating leverage effect. Furthermore, presence of a relationship between the indicators of operating activities and an enterprise's profitability is explained: the effectiveness of entrepreneurial activity is higher (and the value of operating leverage is respectively lower) at the enterprises which are attributed with lower shares of fixed costs in the total cost structure and with higher production profitability. Finally, the article provides calculations of the optimal values of financial safety margin and operating leverage necessary for the implementation of basic and expanded reproduction in the conditions of the southern region of the Republic of Moldova. Tabl.: 1. Figs.: 2. Refs.: 3.