There is an inverse relationship between degree of operating leverage and the margin of safety.

Question

Quizplus · Accepted Answer

The degree of operating leverage measures the percentage change in profit resulting from a percentage change in sales. Higher degrees of operating leverage indicate that a company’s profits will be more sensitive to changes in sales volume. On the other hand, the margin of safety measures the amount by which sales can decrease before a company incurs losses. Therefore, as the degree of operating leverage increases, the margin of safety decreases, and vice versa. This relationship is known as the "leverage versus safety trade-off."

There Is an Inverse Relationship Between Degree of Operating Leverage