Leverage is generally defined as the ratio of the percentage change in profits to the percentage change in sales. In other words, leverage is the multiplying effect that fixed costs have on profits when there is any change in sales. As sales increases or decreases, it is only the variable costs that change correspondingly, fixed costs remain constant. Profits therefore increase or decrease at a faster rate than the rate of change in sales. This can be better understood with an example.
Click here to Download a PDF file