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Cost & pricing
Operating leverage
How much profit changes for a given change in revenue, driven by the share of costs that are fixed. High fixed costs mean profit swings harder than sales in both directions.
Owned by: Senior analystTest band: Senior analyst
The formula
Degree of operating leverage = Contribution margin ÷ Operating income
In practice
A business past break-even with high leverage sees most of each extra dollar fall to profit. Below break-even, the same leverage is what makes losses brutal.
The kind of thing the test asks
- A business has high fixed costs and is just past break-even. A 10% revenue increase will…