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Definition And Meaning Of Operating Leverage

OPERATING LEVERAGE:

The leverage associated with investment activities is called as operating leverage. It is caused due to fixed operating expenses in the company. Operating leverage may be defined as the company’s ability to use fixed operating costs to magnify the effects of changes in sales on its earnings before interest and taxes. Operating leverage consists of two important costs viz., fixed cost and variable cost. When the company is said to have a high degree of operating leverage if it employs a great amount of fixed cost and smaller amount of variable cost. Thus, the degree of operating leverage depends upon the amount of various cost structure. Operating leverage can be determined with the help of a break even analysis.

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Operating leverage can be calculated with the help of the following formula:

OL = C / OP

Where,

OL = Operating Leverage

C = Contribution

OP = Operating Profits

Definition And Meaning Of Operating Leverage Definition And Meaning Of Operating Leverage Reviewed by Blog Editor on Monday, May 29, 2017 Rating: 5

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