1. What is Operating Leverage?

Operating leverage measures how a company's operating income changes in response to a change in sales. Companies with high operating leverage have a high proportion of fixed costs, while those with low operating leverage have a higher proportion of variable costs.

2. How Does the Calculator Work?

The calculator uses the Degree of Operating Leverage (DOL) formula:

Where:

• \( Contribution\ Margin \) — Sales revenue minus variable costs
• \( Operating\ Income \) — Contribution margin minus fixed costs

Explanation: The DOL shows how sensitive a company's operating income is to changes in sales volume.

3. Importance of Operating Leverage

Details: Understanding operating leverage helps businesses make decisions about cost structure and pricing strategy. High operating leverage means profits are more sensitive to sales changes.

4. Using the Calculator

Tips: Enter contribution margin and operating income in USD. Both values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: What does a high DOL indicate?
A: A high DOL indicates that a small change in sales will result in a large change in operating income, meaning the company has high fixed costs.

Q2: What is a good DOL value?
A: There's no "good" or "bad" value - it depends on the company's strategy and industry. Higher DOL means higher risk but also higher potential returns.

Q3: How is contribution margin calculated?
A: Contribution Margin = Sales Revenue - Variable Costs

Q4: What's the difference between operating leverage and financial leverage?
A: Operating leverage relates to fixed operating costs, while financial leverage relates to fixed financing costs (debt).

Q5: Can DOL be negative?
A: No, DOL should always be positive as both contribution margin and operating income should be positive for a healthy business.