Question

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.

Answer 1

Answer:

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.