Operating leverage: drag volume
Drag units sold. Price, variable cost and fixed costs stay still, so degree of operating leverage moves only because EBIT does. Near break-even the ratio is large, because a thin EBIT sits under a full contribution. Further out it falls.
Degree of operating leverage
3.00
Units
2400
Break-even is 1600 units. Near that count, operating leverage is large because EBIT is thin. Further out it falls. Illustrative arithmetic, not a forecast or advice.
EBIT at this count
$12,000.00 after $24,000.00 of fixed costs.
In short
- Drag the bar right for more units, more EBIT, and a lower degree of operating leverage.
- Drag it left toward break-even, where the ratio climbs because EBIT is thin.
- Watch EBIT, contribution minus fixed costs, at the count you set.
- Focus the handle and use the arrow keys to step units.
Contribution over EBIT
How operating leverage works is the identity. How break-even analysis works is the count where EBIT is zero. The break-even calculator is that count. How margin of safety works is how far above it you sit.
Fixed costs are the reason it exists
Fixed costs do not move with the extra unit. Variable costs do. Operating leverage is that split, read as a multiplier on a change in volume.
Financial leverage is a different ratio
Operating against financial leverage is the pair. Do not mash a volume multiplier with a balance-sheet D/E.
Common questions
Why is the ratio larger near break-even?
Because EBIT is the denominator and is close to zero there. The same contribution sits over a thinner residual.
Is a high reading good?
It means profit moves hard when volume moves. That cuts both ways.
Is this a forecast?
No. It is one product on a teaching sheet. It is educational material, not advice.
Keep reading
This page is educational material, not financial advice. The figures come from the formula shown and assume the inputs you enter hold for the whole term. Your own rate, fees, taxes and timing will differ, so treat the output as arithmetic to check a decision against, not as a recommendation.