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EBIT for Various Sales Volume

TABLE

1

Applying Equation 1 + 1, DOL = 1. Since the quotient is 1. there is no operating leverage.

Since operating leverage (magnifying the effects of a change in sales) can be favorable or unfavorable, higher levels of risk are attached to higher degrees of leverage. Since DOL depends on fixed operating costs, it logically follows that the larger the fixed operating cost, the higher is the firm’s operating leverage and its operating risk. High operating leverage is good when revenues are rising and bad when they are falling. Operating risk is the risk of the firm not being able to cover its fixed operating costs. The larger the magnitude, the larger the volume of sales required to cover all fixed costs.

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