Operating Leverage Analysis - A Conceptual Framework
IOSR Journal of Business and Management (IOSRJBM), Volume 3, Issue 2 (July-August 2012), pp. 8-27
20 Pages Posted: 22 Jan 2012 Last revised: 3 Nov 2018
Date Written: 2012
Abstract
A conceptual framework for intra-firm operating leverage analysis {based on the mechanical analysis of physical leverage (the genesis of the concept of operating leverage)} of a manufacturing firm under condition of future business risk considering a short-term planning horizon, composed of (a) an ex-ante analysis conducted at the beginning of the period for choosing an 'Operating Account Structural Plan’ (OASP) from alternative OASPs based on the principle of maximization of expected utility {or principle of minimization of absolute value of expected disutility (negative utility)} of the ‘elasticity coefficient measure’ of the ‘Degree of Operating Leverage’ (DOL) considering the degrees of ‘Downside Operating Leverage Risk (DOLR) averseness’ and ‘Upside Operating Leverage Risk (UOLR) affinity’ subjectively assigned by the decision-maker, and (b) an ex-post analysis conducted at the end of the period for the performance appraisal of the decision-maker based on ‘operating leverage efficiency', is formulated and illustrated in this working paper.
Keywords: Physical Leverage, Operating Leverage, Operating Account Structural Plan, Degree of Operating Leverage, Operating Leverage Risk, Downside Operating Leverage Risk, Upside Operating Leverage Risk, Coefficient of Variation, Mean Absolute Deviation, Operating Leverage Efficiency
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