so its DOL is This could also be computed as 80% = Contribution Margin Ratio divided by 60% = Operating Margin. It currently has Sales of and Operating Income of , so additional Unit Sales (say of 100,000 units) yield $5m more Sales and $4m more Operating Income: a 10% increase in Sales and a increase in Operating Income. Assuming the model, for a given level of sales, the DOL is higher the higher fixed costs are (an example): for a given level of sales and profit, a company with higher fixed costs has a lower Operating Income, and hence its Operating Income increases more rapidly with Sales than a company with lower fixed costs (and correspondingly lower contribution margin and higher Operating Income). If a company has no fixed costs (and hence breaks even at zero), then its DOL equals 1: a 10% increase in Sales yields a 10% increase in Operating Income, and its operating margin equals its contribution margin: DOL is highest near the break-even point; in fact, at the break-even point, DOL is undefined, because it is infinite: an increase of 10% in sales, say, increases Operating Income for 0 to some positive number (say, ), which is an infinite (or undefined) percentage change; in terms of margins, its Operating Margin is zero, so its DOL is undefined. Similarly, for a very small positive Operating Income (say, ), a 10% increase in sales may increase Operating Income to , a 100x (or 9,900%) increase, for a DOL of 990; in terms of margins, its Operating Margin is very small, so its DOL is very large. DOL is closely related to the rate of increase in the operating margin: as sales increase past the break-even point, operating margin rapidly increases from 0% (reflected in a high DOL), and as sales increase, asymptotically approaches the contribution margin: thus the rate of change in operating margin decreases, as does the DOL, which asymptotically approaches 1. Industry-specific Examples of companies with high operating leverage include companies with high R&D costs, such as pharmaceuticals: it can cost billions to develop a drug, but then pennies to produce it. Hence from a life cycle cost analysis perspective, the ratio of preproduction costs (e.g. design widgets) versus incremental production costs (e.g. produce a widget) is a useful measure of operating leverage. Outsourcing Outsourcing a product or service is a method used to change