The Mystery of Operating Leverage
25 Pages Posted: 12 May 2020 Last revised: 6 Dec 2020
Date Written: April 17, 2020
Operating leverage is one of the more popular parameters used in management practice and scientific research. However, its definition and measurement method are not coherent and are presented imprecisely in both textbooks and scientific publications. This results in a great deal of freedom among authors in the selection of measures for estimating operating leverage and the interpretation of the results, which has a negative impact on functionality for synthesis and theory building. Although some authors made such reservations clear as early as the 1980s, the situation has not changed. The article critically analyses the operational leverage measures used in recent publications and proposes to organize and refine the concept of operational leverage as leverage to increase value added and profit at a given output level using a trade-off mechanism between variable and fixed costs. The measure of this leverage is the share of fixed costs in total costs measured at the break-even point.
Keywords: Operating leverage, DOL, Financial leverage, DFL, Trade-off, Operating risk, Fixed costs, Cost structure
JEL Classification: G31, G32, M21, M41
Suggested Citation: Suggested Citation