Degree of operating leverage
Degree of operating leverage is contribution margin divided by operating income at a given sales level; it measures the percentage change in operating income produced by a one percent change in revenue, signalling how sensitive profit.
FrameworkCVP analysis
See it move
A company with €500,000 contribution margin and €100,000 operating income has a degree of operating leverage of 5, found by dividing contribution margin by operating income. That leverage cuts both ways: a 10% rise in revenue lifts operating income by roughly 50%, while a 10% decline destroys about half of it.
The formula
Variables
- Degree of operating leverage at the current sales level (ratio)
- Contribution margin (revenue minus all variable costs) (€)
- Earnings before interest and tax (operating income after deducting all fixed costs) (€)
Calculated at a specific sales level; DOL falls naturally as volume grows above break-even and the fixed-cost burden is progressively absorbed.
Variables
- Change in operating income resulting from the revenue change (€)
- Change in revenue (€)
- Degree of operating leverage at the starting sales level (ratio)
A DOL of 5 means a 10% revenue increase raises operating income by approximately 50%; the same leverage amplifies a revenue decline equally.
Check yourself
A theatre company earns contribution margin of €250,000 and operating income of €50,000 at its current ticket sales level. A manager claims that a 10 per cent increase in ticket revenue will produce an approximately 50 per cent increase in operating income. What is the degree of operating leverage, and is the manager's claim correct?