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


advantages and disadvantages of advertising on the internetadvantages and disadvantages of financial institutionsdisadvantages of price skimmingmixed economy tagalogbond ladder strategyfdi & fiioligopoly and its featuresadjusting unearned revenuedirect quotation and indirect quotationwhat is capm modelfactoring in financial managementhorizontal communication flowthree golden rules of accountingexamples of consumer goods and capital goodscheque and draft differenceadvantages and disadvantages of specializationwhat are characteristics of a traditional economyunsystamatic riskcompare and contrast socialism and capitalismabsolute advantage trade theorydifferentiate between direct and indirect taxesunearned rent revenuecost accounting fifo methodadvantages of a debentureprivatization defwhat is the law of diminishing returns in economicsdiversifiable riskcash in flowdiscounting of billa distinguishing feature of managerial accounting iswhy is a trial balance preparedadvantages and disadvantages of penetration pricingdebentures advantagesdisadvantages of privatizationcommand economy definition for kidsdisadvantages of stocksunearned income journal entryfluctuating exchange ratesdisadvantages sales promotionthe accumulated depreciation account is calledmeaning of pros and cons in hindihorizontal integration advantages and disadvantagesdiminishing method of depreciationorder cheque and bearer chequeautocratic leadership theorydisadvantages of organisation structuredisadvantages of jitwhat are the advantages and disadvantages of brandinginelastic goods examplesdefine market penetration pricingunitary elastic demand graphdisadvantages of specializationdifference between authorised shares and issued sharesmarketing skimming pricingdefinition of fixed capitaldurable and nondurableexample of a horizontal mergerassumptions of capm modelexample of conglomerate integrationdisadvantages of financial statementsaudit opinion unqualifiedactivity ratios formulawhat is full form of ipoblue ocean vs red ocean strategyfmcg long formdisadvantages of hedge fundswhat is capm in financefeatures of urbanisationdraweeunqualified auditgolden rules of accounting with journal entriesexample of unitary elastic demanddefinition of complements in economicsdisadvantages of marketing strategystrengths and weaknesses of mixed economycash reserve ratio and statutory liquidity ratiowhat is the difference between a wholesaler and a retailer