Illustrated Guide to Business and Marketing Terms

Operating Leverage

Operating Leverage

The formula for calculating operating leverage is Contribution Margin/ Net Operating Income. Companies tend to fall into two categories of operating leverage:

  1. High Operating Leverage – this is a company with high fixed cost relative to their total costs. A company with high operating leverage has low variable costs, so the contribution margin on each unit sold yields relatively high profit for the company. This high profit is then used to pay off the high fixed costs, which means they need a high volume and steady stream of sales to stay profitable. An example of this is a software company. Selling 10 subscriptions vs. 1000 subscriptions has almost no impact on variable costs, but in either scenario the company will still have to pay expensive developer salaries.
  2. Low Operating Leverage – this is a company where the fixed costs are relatively low, and most of their expenses come from variable costs. A company like this has a smaller contribution margin, but also needs to make fewer volume of sales to be profitable, since they have low fixed costs. An example of a company with a low operating leverage could be an electrician company. When a client needs work, they need to go out and buy supplies to get the job done. The cost of supplies takes a chunk out of the total profit, but the company doesn’t have to worry about a nice big expensive office space in their fixed costs.

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•   (English) Operating Leverage   •   (Español) Palanca de Operacion   •   (Français) Levier D'exploitation   •   (Deutsch) Operating Leverage   •   (Italiana) Influenza Operativa   •   (Nederlands) Operationele Hefboomwerking   •   (Português) Alavancagem Operacional   •   (עברית) מינוף תפעולי   •   (العَرَبِيَّة) الرافعة التشغيلية   •   (हिन्दी) परिचालन लीवरेज   •   (ру́сский язы́к) Рычаг Управления   •   (Dansk) Operationel Gearing   •   (Svenska) Operativ Hävstång   •   (Suomi) Käyttövolyymi   •   (Norsk) Driftsutnyttelse   •   (Türkçe) İşletim Kaldıraç   •   (Polski) Dźwignia Operacyjna   •   (Româna) Pârghie de Exploatare   •   (Ceština) Provozní Páka   •   (Slovenský) Prevádzkový Pákový Efekt   •   (Magyar) Működési Tőkeáttétel   •   (Hrvatski) Operativni Utjecaj   •   (български) Оперативен Лост   •   (Lietuvos) Veiklos Svertas   •   (Slovenščina) Operativni Vzvod   •   (Latvijas) Darbības Sviras   •   (eesti) Tegevusvõimendus