Operating leverage is a measure of how revenue growth translates into growth in operating income. It is a measure of leverage, and of how risky, or volatile, a company's operating income is. Definition There are various measures of operating leverage, which can be interpreted analogously to financial leverage. Costs One analogy is "fixed costs + variable costs = total costs . . . is similar to . . . debt + equity = assets". This analogy is partly motivated because, for a given amount of debt, debt servicing is a fixed cost. This leads to two measures of operating leverage: One measure is fixed costs to total costs: Compare to debt to value, which is Another measure is fixed costs to variable costs: Compare to debt to equity ratio: Both of these measures depend on sales: if the unit variable cost is constant, then as sales increase, operating leverage (as measured by fixed costs to total costs or variable costs) decreases. Contribution Contribution Margin is a measure of operating leverage: the higher the contribution margin is (the lower variable costs are as a percentage of total costs), the faster the profits increase with sales. Note that unlike other measures of operating leverage, in the linear Cost-Volume-Profit Analysis Model, contribution margin is a fixed quantity, and does not change with Sales. Contribution = Sales - Variable Cost DOL and Operating income Operating leverage can also be measured in terms of change in operating income for a given change in sales (revenue). The Degree of Operating Leverage (DOL) can be computed in a number of equivalent ways; one way it is defined as the ratio of the percentage change in Operating Income for a given percentage change in Sales : This can also be computed as Total Contribution Margin over Operating Income: The above equivalence follows as the relative change in operating income with one more unit dX equals the contribution margin divided by operating income while the relative change in sales with one more unit dX equals price divided by revenue (or, in other words, 1 / X with X being the quantity). Alternatively, as Contribution Margin Ratio over Operating Margin: For instance, if a company has sales of 1,000,000 units, at price , unit variable cost of , and fixed costs of , then its unit contribution is , its Total Contribution is , and its Operating Income is ,