Operating leverage measures the percentage change in operating profit with respect to changes in the sales. Therefore, operating leverage is determined through the relationship of the firm's sales and its operating profit (earning before interest and tax). The relationship between contribution margin and EBIT is called degree of operating leverage. It may be defined as the rate of changes in EBIT due to the change in the rate of sales. Degree of operating leverage (DOL) is measured by using any one of the following approaches.
Measuring Degree Of Operating Leverage (DOL) By Income Statement Approach:
DOL = Contribution Margin/EBIT
Measuring Degree Of Operating Leverage By Formula Approach:
DOL = Sales - Variable Cost/Sales - Variable Cost - Fixed Cost
= S-VC/S-VC-FC
