Operating leverage is a cost-accounting formula that measures the degree to which a firm or project can increase operating income by increasing revenue.
Companies with high degrees of operating leverage experience more significant changes in profit when revenues change.
Formula to calculate operating leverage.
The contribution margin is the difference between total sales and total variable costs.
Example:
If the contribution margin is $ 420,000 and the operating income is $ 600,000. Calculate the operating leverage.
Therefore, the operating leverage is 70%.
