As fixed costs drop, what happens to GOP?

When fixed costs decrease, the Gross Operating Profit (GOP) typically rises. This relationship can be understood through the financial equation that defines GOP, which highlights the importance of both revenues and costs in determining profitability.

GOP is calculated as total revenues minus total operating expenses, with fixed costs being a component of those overall operating expenses. When fixed costs drop, the total operating expenses decrease assuming revenues remain stable. As a result, the gap between total revenues and operating expenses—essentially the GOP—widens, leading to an increase in GOP.

This principle reinforces the idea that controlling costs, especially fixed costs, can significantly enhance a business's profitability. Increased GOP indicates more funds are available for reinvestment in the business or to return value to stakeholders.