They're not the same thing.
And mixing them up on exam day can cost you points.
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What is Operating Leverage?
Operating Leverage measures how sensitive your Operating Income (EBIT) is to a change in sales.
It's driven by your cost structure - specifically, how much of your costs are fixed vs variable.
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The Formula:
Degree of Operating Leverage (DOL) = Contribution Margin ÷ Operating Income (EBIT)
Or equivalently:
DOL = % Change in EBIT ÷ % Change in Sales
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Why does it matter?
A company with HIGH fixed costs has HIGH operating leverage.
When sales go up → profits rise sharply.
When sales go down → profits fall sharply.
This is a double-edged sword.
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Real-world example:
A company with:
→ Sales: $1,000,000
→ Variable Costs: $400,000
→ Fixed Costs: $400,000
→ EBIT: $200,000
Contribution Margin = $600,000
DOL = $600,000 ÷ $200,000 = 3
Meaning: a 10% increase in sales → 30% increase in EBIT.
A 10% drop in sales → 30% drop in EBIT.
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The Exam Insight:
CMA examiners love asking:
→ What happens to DOL when fixed costs increase?
→ Which company has higher operating risk?
High DOL = High operating risk = More volatile profits.
Remember: DOL measures business risk, not financial risk.
Financial risk comes from debt. That's Financial Leverage - a completely different concept.
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Simple concept.
But frequently tested.
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Do you find operating leverage confusing?
Drop a comment below - I'll answer every question.
Studying for US CMA Part 2?
I share helpful resources here:
https://tusharfinance.gumroad.com/
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Tushar Sahu
Student
Kumhari CT
India
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