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    Notes - Lecture 3.3.1 PDF

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    Sakiful Islam
    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.

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    Notes - Lecture 3.3.1 PDF

    Uploaded by

    Sakiful Islam
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    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.

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    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.

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    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    25 views1 page

    Notes - Lecture 3.3.1 PDF

    Uploaded by

    Sakiful Islam
    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.

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    of 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.

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