The phenomenon that a dollar in cost savings increases pretax profits by a dollar, while a dollar increase in sales increases pretax profits only by the dollar multiplied by the pretax profit margin is known as the:
A)profit margin.
B)return on assets.
C)saving to spending ratio.
D)profit leverage effect.

Question

Quizplus · Accepted Answer

The phenomenon described in the question is known as the profit leverage effect, where cost savings have a direct impact on increasing pretax profits, while sales revenue only increases pretax profits by the percentage of the profit margin.

The Phenomenon That a Dollar in Cost Savings Increases Pretax