Degree of Operating Leverage Formula

Degree of operating leverage is a concept which is used to calculate the effect of change in earnings of the company due to the change in sales of the company. Given below is the degree of operating leverage formula –

Percentage change in EBIT/Percentage change in sales

It can better explained with the help of an example, suppose a firm has sales of $50000 and Earning before interest and tax for the firm is $5000, now if the sales of the company increase to $100000 and its EBIT increases to $15000 then degree of operating leverage will be 2 which is calculated as under

Percentage change in EBIT is calculated as 15000-5000/5000 = 200%

Percentage change in sales is calculated as 100000-50000/50000 = 100%

Now putting the figures into the above formula we will get the figure of 2 (200%/100%)

The above figure indicates that whenever there is increase in the sales of the company then the earnings before interest and tax of the firm will increase 2 times more. Hence it can be said the higher the degree of operating leverage the better it is for the company.

0 comments… add one

Leave a Comment

Related pages

fifo method of inventorycost push inflation exampleswhat are the advantages and disadvantages of specializationdisinflation refers to a situation wherediversifiable risk definitionprepaid insurance journal entry adjustmentsadvantages of audit programmecost oriented pricing methodsadvantages of specialisation economicswhat are different types of chequescapitalism and socialism differencesentry for prepaid insurancecost push inflation definition economicsadvantages and disadvantages of demographic segmentationtds full formexamples of capital receipts and revenue receiptsventure capital disadvantagesadvantages of deflationbalance sheet horizontal analysismeaning of drawer drawee and payeeunitarily elastichow to write a crossed chequeimportance of hire purchaseprepaid insurance journal entry exampleexplain privatisationfeatures of privatizationdual aspect concept of accounting with examplesdirect expenses meaningwhat is monopolistic competition market structuredemocratic style of management advantages and disadvantagesadvantages of using fifo methodsemi durable consumer goodsadvantage of absorption costingmarket capitalization of icici bankoligopoly characteristicsadvantages and disadvantages of a mixed economydisadvantages of a mixed economic systemexplain capital rationingliquidity ratios listexample of indirect quotationwhat is operating cycle in accountingmeaning of barter systemfeatures of oligopolywhat are the advantages of traditional economymeaning of capital rationingdeferred revenue expenditure accounting treatmentwhat is trial balance in hindinormal good inferior goodslums-curse to urbanisationfictitious assets definitiondisadvantages of horizontal integrationmeaning of monopolistic competitionwikipedia in hindi narendra modidirect quote forexjit advantageswhat is law of diminishing returns in economicswhat is the difference between durable and nondurable goodsadvantages and disadvantages of marketing strategywhat is fictitious assetsdisadvantages of functional organisationintraday tradesunearned revenue in accountingdisadvantages of a mixed economic systemsalary payable journal entryadvantages of a dictatorshipdefinition of complements in economicsfixed exchange rate and floating exchange ratebenefits of swot analysisexample of conglomerate mergerdistinguish between direct and indirect labourfree market economy advantages and disadvantages pdfskim pricing strategydebit cards advantages and disadvantagespenetration pricing strategy pdfaccrued income examplesdisadvantages of job order costingdiversifiable risk refers to riskwhat is the profitability ratiomarket skimming price strategy