Understanding Operating Leverage in Business
Learn about operating leverage, its definition, degree, and characteristics in business. Operating leverage magnifies changes in profits relative to sales and is crucial for understanding business risk and break-even points.
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Presentation Transcript
Meaning of Operating Leverage Operating leverage is defined as the use of fixed operating costs to magnify a change in profits relative to a given changes in sales. Contribution Operating ProfitsorContribution Operating Leverage = EBIT * EBIT = Earning before Interest & Tax *Contribution = Sales-Variable cost
Degree of Operating Leverage The multiplier effect resulting from the use of fixed operating costs can be measured by the degree of operating leverage. The degree of operating leverage (DOL) at any level of output expressed as the ratio of the percentage change in operating profits to percentage change in sales. DOL=% Change in profits % Change in Sale % Change in EBIT % Change in Sale or
Characteristics of Operating Leverage It is related to the assets side of balance sheet. It is directly related to break-even point. It is related to selling price and variable costs. It involves business risk.
