1. What is Operational Leverage?

Degree of Operating Leverage (DOL) measures how a company's operating income (EBIT) changes in response to a change in sales. It shows the proportion of fixed costs in a company's cost structure.

2. How Does the Calculator Work?

The calculator uses the DOL formula:

Where:

• % Change EBIT — Percentage change in earnings before interest and taxes
• % Change Sales — Percentage change in sales revenue

Explanation: A higher DOL indicates that a company has higher fixed costs relative to variable costs, meaning profits are more sensitive to changes in sales volume.

3. Importance of DOL Calculation

Details: Understanding DOL helps businesses assess risk and make decisions about cost structure. High DOL companies benefit more from sales increases but suffer more during sales declines.

4. Using the Calculator

Tips: Enter percentage changes in EBIT and sales (as whole numbers or decimals). Both values must be valid (non-zero).

5. Frequently Asked Questions (FAQ)

Q1: What does a DOL of 2 mean?
A: A DOL of 2 means that for every 1% change in sales, EBIT will change by 2% in the same direction.

Q2: What is considered a high DOL?
A: Typically, DOL above 1.5 is considered high, indicating significant fixed costs in the business model.

Q3: How does DOL relate to business risk?
A: Higher DOL means higher business risk because small changes in sales lead to large changes in operating income.

Q4: Can DOL be negative?
A: Yes, if EBIT and sales changes move in opposite directions, though this is unusual.

Q5: How can companies reduce their DOL?
A: By shifting from fixed to variable costs (e.g., outsourcing instead of owning facilities).