Which company tends to have a higher operating leverage?

A. Microsoft
B. Walmart

Correct Answer: A

The bulk of Microsoft's cost structure is fixed and limited to upfront development and marketing costs. Whether it sells one copy or 10 million copies of its latest Windows software, Microsoft's costs remain basically unchanged. So, once the company has sold enough copies to cover its fixed costs, every additional dollar of sales revenue drops into the bottom line. In other words, Microsoft possesses remarkably high operating leverage. For Walmart, the company has fairly low levels of fixed costs, while its variable costs are large. Merchandise inventory represents Walmart's biggest cost.