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

An analyst finds that a company's operating income grew much faster than revenue during a year in which fixed costs were a large share of total costs. This pattern is best explained by:

The pattern is best explained by operating leverage. When fixed costs are a large share of total costs, additional revenue flows disproportionately to operating income, so operating income grows faster than revenue.

  1. Aoperating leverageCorrect
  2. Ba lower financial leverage ratio
  3. Ca higher inventory turnover

Explanation

With high fixed costs, an increase in revenue raises operating income by a larger percentage because costs do not rise proportionally. This is operating leverage. Financial leverage relates to interest costs below operating income, and inventory turnover is an efficiency measure.

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