IPCC RTP – Last 7 Attempts

📘 Meaning:

Operating leverage measures how sensitive a company’s operating income (EBIT) is to changes in its sales. It arises due to the presence of fixed costs in the company’s cost structure.

📊 Formula:

\text{Degree of Operating Leverage (DOL)} = \frac{\%\text{ Change in EBIT}}{\%\text{ Change in Sales}}

📈 Interpretation:

• High operating leverage = higher fixed costs, profits rise faster with increased sales but drop sharply when sales fall.

• Low operating leverage = more variable costs, profits are less sensitive to sales changes.

💬 Example:

If sales increase by 10% and EBIT increases by 20%,

then DOL = 20% ÷ 10% = 2, meaning profits change twice as fast as sales.