Location via proxy:   [ UP ]  
[Report a bug]   [Manage cookies]                
Scribd
Upload
41 views

Notes - Lecture 3.3.1 PDF

Operating leverage measures how sensitive net operating income is to percentage changes in sales. It is calculated as the contribution margin divided by the net operating income. For a company called RBC, its degree of operating leverage is 5 based on its actual sales of $250,000, contribution margin of $100,000 and net income of $20,000. This means that if RBC increases sales by 10%, its net operating income will increase by 50% due to the magnifying effect of its fixed costs.

Uploaded by

Sakiful Islam
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
41 views

Notes - Lecture 3.3.1 PDF

Operating leverage measures how sensitive net operating income is to percentage changes in sales. It is calculated as the contribution margin divided by the net operating income. For a company called RBC, its degree of operating leverage is 5 based on its actual sales of $250,000, contribution margin of $100,000 and net income of $20,000. This means that if RBC increases sales by 10%, its net operating income will increase by 50% due to the magnifying effect of its fixed costs.

Uploaded by

Sakiful Islam
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 1

Operating Leverage

Operating leverage is a measure of how sensitive net operating income is to percentage


changes in sales. It is a measure, at any given level of sales, of how a percentage change in
sales volume will affect profits.

Degree of Operating Leverage = Contribution Margin/Net Operating Income

Operating Leverage – Illustrations

To illustrate, let us revisit the contribution income statement for RBC.

Actual sales
500 Bikes
Sales $ 250,000
Less: variable expenses 150,000
Contribution margin 100,000
Less: fixed expenses 80,000
Net income $ 20,000

Degree of Operating Leverage = $100,000/$20,000 = 5

With an operating leverage of 5, if RBC increases its sales by 10%, net operating income
would increase by 50%.

Percent increase in sales 10%


Degree of operating leverage × 5
Percent increase in profits 50%

Exercises: 5-9, 5-15 (1)

Core Reading/Textbook

Garrison, Ray, H., Noreen, Eric, W., & Brewer, Peter, C. (2015). Managerial Accounting. [15th
Edition]. The McGraw-Hill, New York, USA.

You might also like