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What is my operating leverage?

Enter sales, variable costs and fixed costs for one period. Or enter sales and operating income for two periods. The calculator shows how strongly operating income moves when sales change.

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Start from
Degree of operating leverage (DOL)
1.74

The degree of operating leverage is 1.74: a 1% change in sales changes operating income by 1.74%.

Contribution margin
$148,000.00
Operating income
$85,000.00
Change in operating income
17.41%

Degree of operating leverage (DOL): 1.74. The degree of operating leverage is 1.74: a 1% change in sales changes operating income by 1.74%.

The results are estimates for information only. They are not financial, tax, or legal advice. Check the numbers with your lender or a qualified professional before you decide. Terms of use

How to calculate

Computes the degree of operating leverage (DOL): contribution margin divided by operating income, or the percent change in operating income over the percent change in sales.

Example with the default inputs (Start from Sales and costs, Sales $250,000.00, Variable costs $102,000.00, Fixed costs $63,000.00, Change in sales 10%): The degree of operating leverage is 1.74: a 1% change in sales changes operating income by 1.74%.

Method: From sales and costs: contribution margin = sales − variable costs; operating income = contribution margin − fixed costs; DOL = contribution margin ÷ operating income; change in operating income = DOL × change in sales. From two periods: DOL = ((income after − income before) ÷ income before) ÷ ((sales after − sales before) ÷ sales before).

  • Variable costs change in proportion to sales and fixed costs stay the same, so DOL holds for changes from this sales level.
  • Operating income is income before interest and income tax.
  • Arithmetic is exact on the typed decimals; DOL shows to 2 decimals, percents to 2 decimals and money to the cent, halves up.

Machine-readable copies: Markdown, JSON.

Worked examples

Each example is checked against the calculator on every build.

  1. Start from Sales and costs, Sales $250,000.00, Variable costs $102,000.00, Fixed costs $63,000.00, Change in sales 10% gives Degree of operating leverage (DOL) 1.741176, Contribution margin $148,000.00, Operating income $85,000.00, Change in operating income 17.411765%.Source: OpenStax, Principles of Managerial Accounting, 3.5 Calculate and Interpret a Company’s Margin of Safety and Operating Leverage (degree of operating leverage = contribution margin ÷ net operating income; DOL × percentage change in sales = percentage change in net operating income; Company A and Company B). https://openstax.org/books/principles-managerial-accounting/pages/3-5-calculate-and-interpret-a-companys-margin-of-safety-and-operating-leverage: 148,000 ÷ 85,000 = 1.74 (rounded)
  2. Start from Sales and costs, Sales $315,000.00, Variable costs $105,000.00, Fixed costs $125,000.00, Change in sales 10% gives Degree of operating leverage (DOL) 2.470588, Contribution margin $210,000.00, Operating income $85,000.00, Change in operating income 24.705882%.Source: OpenStax, Principles of Managerial Accounting, 3.5 Calculate and Interpret a Company’s Margin of Safety and Operating Leverage (degree of operating leverage = contribution margin ÷ net operating income; DOL × percentage change in sales = percentage change in net operating income; Company A and Company B). https://openstax.org/books/principles-managerial-accounting/pages/3-5-calculate-and-interpret-a-companys-margin-of-safety-and-operating-leverage: 210,000 ÷ 85,000 = 2.47 (rounded)
  3. Start from Two periods, Sales before $250,000.00, Sales after $200,000.00, Operating income before $85,000.00, Operating income after $55,400.00 gives Degree of operating leverage (DOL) 1.741176, Change in sales -20%, Change in operating income -34.823529%.Source: OpenStax, Principles of Managerial Accounting, 3.5 Calculate and Interpret a Company’s Margin of Safety and Operating Leverage (degree of operating leverage = contribution margin ÷ net operating income; DOL × percentage change in sales = percentage change in net operating income; Company A and Company B). https://openstax.org/books/principles-managerial-accounting/pages/3-5-calculate-and-interpret-a-companys-margin-of-safety-and-operating-leverage (Company A: sales $200,000 and net income $55,400 after a 20% decrease, 34.8% less income)
  4. Start from Sales and costs, Sales $400,000.00, Variable costs $250,000.00, Fixed costs $180,000.00 gives Degree of operating leverage (DOL) -5, Contribution margin $150,000.00, Operating income -$30,000.00.Source: OpenStax, Principles of Managerial Accounting, 3.5 Calculate and Interpret a Company’s Margin of Safety and Operating Leverage (degree of operating leverage = contribution margin ÷ net operating income; DOL × percentage change in sales = percentage change in net operating income; Company A and Company B). https://openstax.org/books/principles-managerial-accounting/pages/3-5-calculate-and-interpret-a-companys-margin-of-safety-and-operating-leverage (formula)

How it works

From sales and costs for one period:

  • Contribution margin = sales − variable costs
  • Operating income = contribution margin − fixed costs
  • Degree of operating leverage (DOL) = contribution margin ÷ operating income
  • Change in operating income (when you enter a change in sales) = DOL × change in sales

From two periods:

  • Change in sales = (sales after − sales before) ÷ sales before × 100
  • Change in operating income = (operating income after − operating income before) ÷ operating income before × 100
  • DOL = change in operating income ÷ change in sales

Rules:

  • Sales must be more than $0, because a percent change from $0 of sales has no value. Variable costs and fixed costs are $0 or more. Sales before and operating income before must be more than $0; sales after are $0 or more and operating income after may be negative. Each amount is at most $1 quadrillion. The change in sales is −100% to 1,000,000% and optional.
  • Operating income of exactly $0 (the break-even point) gives no answer, and so do two periods with the same sales.
  • DOL may be negative (below break-even).
  • A result too large to show as a number gives no answer. So does a result that is not 0 but too small to show as a number.
  • The arithmetic is exact on the decimals you type. DOL and the percents show to 2 decimals and money to the cent, with halves rounded up (away from 0).

Assumptions

  • Variable costs change in proportion to sales and fixed costs stay the same, so the DOL from one period holds for changes from that sales level.
  • Operating income is before interest and income tax (net operating income).
  • From two periods, the result is an average over the change; it matches the one-period DOL at the earlier sales level when costs behave as above.

Worked examples by hand

Company A. Sales $250,000, variable costs $102,000, fixed costs $63,000. Contribution margin = $148,000. Operating income = 148,000 − 63,000 = $85,000. DOL = 148,000 ÷ 85,000 = 1.74. A 10% rise in sales raises operating income by 1.7412 × 10 = 17.41% (OpenStax rounds to 17.4%).

Company B. Sales $315,000, variable costs $105,000, fixed costs $125,000. Contribution margin = $210,000; operating income = $85,000. DOL = 210,000 ÷ 85,000 = 2.47, and a 10% rise in sales gives 24.71% more operating income.

Company A after a 20% fall in sales. Sales went from $250,000 to $200,000 (−20%) and operating income from $85,000 to $55,400 (−29,600 ÷ 85,000 = −34.82%). DOL = −34.82 ÷ −20 = 1.74, the same as from its costs.

Below break-even. Sales $400,000, variable costs $250,000, fixed costs $180,000. Contribution margin = $150,000; operating income = −$30,000. DOL = 150,000 ÷ −30,000 = −5.

Other questions people ask

What is operating leverage?

Operating leverage measures how sensitive operating income is to a change in sales. A business with high fixed costs and low variable costs has high operating leverage: once its fixed costs are covered, each extra sale adds a lot to income, and each lost sale takes a lot away.

How do I calculate the degree of operating leverage?

Divide the contribution margin (sales minus variable costs) by operating income. Company A had sales of $250,000, variable costs of $102,000 and fixed costs of $63,000: contribution margin $148,000, operating income $85,000, so its DOL was 148,000 ÷ 85,000 = 1.74.

How do I calculate DOL from two periods?

Divide the percent change in operating income by the percent change in sales. When Company A's sales fell 20%, from $250,000 to $200,000, its operating income fell 34.82%, from $85,000 to $55,400, so its DOL was 34.82 ÷ 20 = 1.74.

What does a DOL of 2.47 mean?

Each 1% change in sales changes operating income by 2.47%. Company B's DOL was 2.47, so a 10% rise in sales would raise its operating income by 24.7%, and a 10% fall would cut it by 24.7%.

Is high operating leverage good or bad?

Both. High operating leverage makes profits grow fast when sales rise, but fall fast when sales drop, so it adds risk. A business whose costs are mostly fixed has high operating leverage; one whose costs are mostly variable has low operating leverage.

Why is my degree of operating leverage negative?

Sales are below the break-even point, so operating income is a loss. DOL is then negative and hard to read; it is largest in size just above and below break-even. At exactly break-even, operating income is $0 and DOL has no value.