A term used to describe the effect of $1 in cost savings increasing pretax profits by $1 and a $1 increase in sales increasing pretax profits only by $1 multiplied by the pretax profit margin.

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Business

Joanna Crane

10 May, 22:41

A term used to describe the effect of $1 in cost savings increasing pretax profits by $1 and a $1 increase in sales increasing pretax profits only by $1 multiplied by the pretax profit margin.

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Reece Norris · Answer 1

Profit leverage effect

Explanation:

The profit leverage effect explains why a 1% decrease in costs increases pretax profit more than a 1% increase in sales revenue.

An increase in sales revenue is always associated with an increase in costs, so the net change in pretax profit is = additional sales revenue - additional costs.

While a decrease in costs will increase pretax profit in the same proportion.