How to Calculate Operating Leverage
What is Operating Leverage?
Operating leverage measures how sensitive a company's operating profit is to changes in revenue. High fixed costs relative to variable costs create high operating leverage — a small revenue increase produces a large profit increase, and vice versa.
Step-by-Step Guide
- 1Operating leverage = % change in operating profit / % change in revenue
- 2Or: Contribution margin / Operating profit (EBIT)
- 3High fixed costs → higher leverage → more risk and reward
- 4Low fixed costs (more variable) → lower leverage → more stable but less upside
Worked Examples
Input
Revenue up 10% → Operating profit up 30%
Result
Operating leverage = 3x
Every 1% revenue change → 3% profit change
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