Uncertainty, the Theory of Production, and Optimal Operating Leverage: I. Introduction

Abstract

A firm's operating leverage decision involves choice among alternative production arrangements which differ in terms of "fixed" and "variable" cost components. Higher operating leverage is generally associated with higher levels of fixed costs and correspondingly higher levels of expected operating profit and higher variability or volatility in operating profit. While some attempts to define the association between operating leverage and firms' risk positions have been made, they are incomplete in the sense that they do not constitute a theory of (optimal) operating leverage, but treat it as a given technical parameter.