How operating leverage is

Solution

Operating leverage can be calculated using the following formula: Operating Leverage = Contribution / Operating Income where Contribution Margin is the amount of revenue left over after variable costs have been paid, and Operating Income is the total amount of revenue minus all operating expenses, including both fixed and variable costs. Another way to calculate operating leverage is to use the following formula: Operating Leverage = % Change in Operating Income / % Change in Sales This formula shows how a percentage change in sales affects a percentage change in operating income. A higher operating leverage indicates that a small change in sales can have a significant impact on operating income, whereas a lower operating leverage means that a large change in sales is needed to have a significant impact on operating income.