Operating leverage refers to the use of the fixed cost in the operation of the firm, and it accentuates fluctuations in the firm’s operating profit due to changes in sales. Thus, the degree of operating leverage may be defined as the percentage change in the operating profit (earnings before interest and tax) on account of change in sales.
Operating leverage is a very important concept in the context of cost volume profit analysis.
Degree of operating leverage is calculated as follows
Degree of operating leverage