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CFA Level I · CFA Level I Exam · Company Analysis: Past, Present, and Future

A software firm sells annual subscriptions, has low variable costs per additional customer, and benefits as more users join its platform. Which feature of its business model most likely supports rising operating margins as revenue grows?

High operating leverage from largely fixed costs most likely supports rising margins. When variable cost per extra subscriber is low, additional revenue falls mostly to operating profit, so margins expand as the user base grows, unlike with hardware sales or heavy inventory.

  1. AHigh operating leverage from largely fixed costsCorrect
  2. BReliance on one-time hardware sales
  3. CLarge inventory holdings requiring financing

Explanation

With largely fixed costs and low variable cost per customer, extra revenue adds disproportionately to operating profit, so margins expand. Hardware sales and inventory do not describe this model and would not raise margins in this way.

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