What is the relationship between cost growth and revenue growth according to Cost Leverage?

The principle of Cost Leverage emphasizes that when revenue increases at a rate that surpasses cost growth, the result is a more significant increase in profits. This is primarily because a business can spread its fixed costs over a larger sales volume. When revenue grows faster than costs, each additional unit sold contributes more to the bottom line since the fixed costs have already been covered.

This phenomenon is crucial for companies aiming for sustainable profit growth. It highlights the importance of managing costs effectively while pursuing revenue growth strategies. By ensuring that revenue outpaces costs, a company can enhance profitability, thereby accelerating overall profit growth. This concept underlies many strategic decisions in business, particularly in competitive markets where maintaining healthy margins is vital for success.

The other choices do not accurately reflect the principle of Cost Leverage. For instance, if costs grow faster than revenues, profit margins would generally decrease, not accelerate, and pursuing revenue growth independently of cost changes fails to take into account the interconnected nature of these two components. Furthermore, the idea that high fixed costs always reduce profit margins overlooks situations where increased sales volume can effectively distribute those fixed costs, potentially enhancing margins instead.