How to Calculate Degree of Operating Leverage

Operating leverage arises when a firm has fixed operating costs in its income stream. The presence of operating leverage magnifies the effects of changes in sales to the firm’s operating earnings, i.e., a change in the volume of sales results in a “more than proportional” change in operating profit (or loss).

The degree of operating leverage is a leverage ratio that measures how a percentage change in sales volume will affect the firm’s operating profits (EBIT), at a certain level of sales.

We can calculate the DOL of a company at a particular level of sales as follows:


  • Q is the quantity of sales
  • P is the price per unit
  • VC is the variable cost
  • FC is the fixed cost
  • S is Sales
  • TVC is total variable cost


Annie Davis wants to determine the degree of operating leverage at sales levels of 6,000 and 8,000 units.  Assume that:

Fixed costs are $100,000

Baskets are sold for $40 each

Variable costs are $15 per basket

DOL at 6000 units:

DOL at 8000 units:

DOL is interpreted as follows: A 1% increase in sales above the 8,000 unit level increases EBIT by 2% because of the existing operating leverage of the firm.

Also observe that DOL is higher at lower level of sales and it declines as sales increase.

Related Downloads

Related Quizzes

Measures of Leverage
Learn the skills required to excel in data science and data analytics covering R, Python, machine learning, and AI.

Free Guides - Getting Started with R and Python

Enter your name and email address below and we will email you the guides for R programming and Python.

Saylient AI Logo

Take the Next Step in Your Data Career

Join our membership for lifetime unlimited access to all our data analytics and data science learning content and resources.