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Operating Leverage

The percentage change in operating earnings (i.e., earnings before interest and taxes and any non-operating income) in response to a change in sales volume. The change in sales volume causes implies also that the contribution margin will change, as the percentage change in sales volume and the percentage change in contribution margin are of the same proportion. The degree of operating leverage is given by:

Degree of Operating Leverage

For a simple example, suppose the percentage change in operating income is 30%, whilst the percentage change in sales is 10%. In this case, the degree of operating leverage is: 30%/10%= 3. This indicates that a given percentage change in sales will result in three times as large a percentage change in operating earnings.

The degree of operating leverage can also be calculated using dollar amounts:

Degree of Operating Leverage

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