Operating gearing

A business with high fixed operating costs can experience a large percentage change in operating profit from a smaller percentage change in sales. Under a linear cost-volume-profit model, the degree of operating gearing at a particular output level is contribution divided by operating profit. The measure depends on the level of activity and assumes prices, variable cost per unit and fixed costs behave as modelled. It differs from financial gearing, which arises from financing commitments. Near break-even, small sales movements can have especially large proportional profit effects.