Operating Leverage
Accounting glossary · Understand, connect, apply
Operating leverage describes how a fixed-cost structure can magnify the effect of sales changes on operating profit. Degree of operating leverage is commonly measured as contribution divided by operating profit at a given activity level.
Example
Contribution is 30,000 and operating profit is 10,000, so the degree is 3. A 5% sales increase implies about 15% higher operating profit if the model’s price, variable-cost and fixed-cost assumptions hold.
Remember the difference
The measure changes with the activity level and is undefined at zero operating profit. It is not a promise about future profits or a substitute for a full scenario analysis.
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Published 4 November 2026. Prepared with AI assistance; examples are fictional and simplified for learning.
Examples are simplified for learning. Where a term depends on US law, IFRS, US GAAP or a historical rule, check the context explained above and the requirements relevant to your course.
Study references: OpenStax financial accounting and managerial accounting. For reporting requirements, consult the applicable IFRS Standards or FASB guidance. US tax terms should be checked against the relevant tax-year IRS instructions.
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