Question

what is the operating leverage?

and expending the operating leverage?

Answer 1

Operating leverage shows the percentage of firm's fixed costs to that of its total costs. The definition of Operating leverage under Cost-Accounting provides measures the degree that company can increase its operating income by increasing revenue and fixed costs is stagnant. Operating leverage for a business can be high with low variable costs and higher sales, thus achieving a high gross margin.

OL = Contribution margin/net operating income

OL = % change in variable cost / % change in sales

OL = Q(P-VC) / (Q(P-VC)-FC)

Thus through expansion, we get that Operating leverage measures the sensitivity of a firm’s operating income to that of change in sales.