Answers the Question
How much risk are we taking on?
Calculator for Degree of Operating Leverage
What Is the Degree of Operating Leverage?
The degree of operating leverage is essentially a measure of risk and investment into the fixed costs of production.
Why Is it Important?
- All things being equal, the greater the contribution of fixed (rather than variable) assets that can be applied to production, the greater the risk (and reward) that can be experienced by a vendor.
- This is because it will cost relatively little to scale up production. Of course, should production be halted, the costs for the fixed goods must still be absorbed.
Formula(s) to Calculate Degree of Operating Leverage
- DEGREE OF OPERATING LEVERAGE = PERCENT CHANGE IN EBIT / PERCENT CHANGE IN SALES
- Assuming that high degree of operating leverage is necessarily unmitigated. The use of insurance and other financial instruments may limit the losses that can be incurred.
- Assuming that firms in different marketplaces should have equivalent levels of leverage.