The effect of operating leverage and its impact on profit. Operational lever: clarification of the concept

With an increase in sales revenue. It occurs under the influence of fixed costs for manufacturing process and sale. At the same time, these costs remain unchanged, while revenues grow.

The strength of the operating leverage shows how many percent there will be a change in profit with an increase (decrease) in revenue by 1%. The higher the share of costs (fixed) used in production and sales, the more powerful the leverage. The formula for determining it is the difference between revenue and cost/profit.

The definition of "lever" is used in various sciences. This is a special device that allows you to increase the impact on a particular object. In economics, fixed costs act as such a mechanism. The operating lever reveals how much the company depends on the costs included in this indicator. This indicator characterizes business risk.

The effect of operating leverage is observed in the fact that even a small change in revenue leads to a stronger increase or decrease in profits. Suppose that the share of fixed costs in the cost of production is large, then the firm has a very high level of production leverage. Therefore, the business risk is significant. If such an enterprise changes even slightly the volume of sales, it will receive a significant fluctuation in profits.

Every organization has a break-even point. In it, the level of operating leverage tends to infinity. But with a slight deviation from this point, a quite significant change in profitability occurs. And the greater the deviation from the breakeven point, the less revenue the company receives. It should be borne in mind that almost all firms are engaged in the production or sale of several types of products. Therefore, the effect of operating leverage must be considered in terms of total sales proceeds and for each product (service) separately.

In the case when there is an increase in fixed costs, it is necessary to choose a strategy aimed at increasing sales volumes. In this case, even a decrease in the level does not matter. Only fixed costs affect the effect of operating leverage. Its analysis is important for financial managers. The study of operating leverage helps to choose the right strategy in managing profits, costs and business risk.

There are several factors that affect the level of production leverage:

The price at which the product is sold;

Volume of sales;

Costs are mostly fixed.

If the market has developed an unfavorable conjuncture, then this leads to a decrease in sales. This usually happens in the first stage. life cycle product. Then the break-even point has not yet been overcome. And this requires a significant reduction in fixed costs, the calculation of financial leverage. Conversely, when market conditions are favorable, cost control can be relaxed a little. A similar period can be used to modernize fixed assets, invest in new projects, purchase assets, etc.

The sectoral affiliation of the enterprise dictates certain requirements for the amount of capital investments, labor automation, for the qualifications of specialists, etc. If the organization works in the field of mechanical engineering, heavy industry, then the management of the operating lever is difficult. This comes with high fixed costs. But if the firm is engaged in the provision of services, then the regulation of operating leverage is quite simple.

Purposeful management of variable and fixed costs, changing them depending on the current market situation will reduce business risk and increase

Definition

Operating leverage effect ( English Degree of Operating Leverage, DOL) is a coefficient that shows the degree of efficiency in managing fixed costs and the degree of their impact on operating income ( English Earnings before interest and taxes, EBIT). In other words, the ratio shows how much the operating income will change if the volume of sales proceeds changes by 1%. Companies with a high ratio are more sensitive to changes in sales volume.

High or low operating lever

The low value of the operating leverage ratio indicates the prevailing share of variable expenses in the total expenses of the company. Thus, sales growth will have a weaker impact on operating income growth, but such companies need to generate lower sales revenue to cover fixed costs. Ceteris paribus, such companies are more stable and less sensitive to changes in sales.

The high value of the operating leverage ratio indicates the predominance of fixed costs in the structure of the company's total costs. Such companies receive a higher increase in operating income for each unit of increase in sales, but are also more sensitive to its decrease.

It is important to remember that a direct comparison of the operating leverage of companies from different industries is incorrect, since industry specifics largely determine the ratio of fixed and variable costs.

Formula

There are several approaches to calculating the effect of operating leverage, which, nevertheless, lead to the same result.

In general, it is calculated as the ratio of the percentage change in operating income to the percentage change in sales.

Another approach to calculating the operating leverage ratio is based on the marginal profit ( English Contribution Margin).

This formula can be transformed as follows.

where S - sales revenue, TVC - total variable costs, FC - fixed costs.

Also, the operating leverage can be calculated as the ratio of the contribution margin ratio ( English Contribution Margin Ratio) to the operating margin ( English Operating Margin Ratio).

In turn, the marginal profit ratio is calculated as the ratio of marginal profit to sales proceeds.

The operating profit ratio is calculated as the ratio of operating income to sales revenue.

Calculation example

In the reporting period, the companies demonstrated the following indicators.

Company A

Percent change in operating income +20%
Percent change in sales revenue +16%

Company B

Sales proceeds 5 mln.
Total variable costs 2.5 million c.u.
Fixed costs 1 million c.u.

Company B

Sales proceeds 7.5 mln.
Cumulative marginal profit of 4 million c.u.
Operating profit ratio 0.2

The operating leverage ratio for each of the companies will be as follows:

Let's assume that each company has a 5% increase in sales. In this case, Company A's operating income will increase by 6.25% (1.25×5%), Company B by 8.35% (1.67×5%), and Company C by 13.35% ( 2.67×5%).

If all companies experience a 3% decrease in sales, Company A's operating income will decrease by 3.75% (1.25×3%), Company B's by 5% (1.67×3%), and Company B by 8% (2.67×3%).

A graphical interpretation of the impact of operating leverage on the amount of operating income is shown in the figure.

As you can see from the chart, Company B is the most vulnerable to a decline in sales, while Company A will show the most resilience. On the contrary, with an increase in sales volume, Company B will show the highest growth rate of operating income, and Company A will show the lowest.

conclusions

As mentioned above, companies with high operating leverage are vulnerable to even small declines in sales. In other words, a few percent drop in sales can result in a significant loss of operating income or even an operating loss. On the one hand, such companies must carefully manage their fixed costs and accurately predict changes in sales volume. On the other hand, in favorable market conditions, they have a higher potential for operating income growth.

However, it is not enough to simply assess the dynamics of the income received by the company, since the current activity is associated with serious operational risks, in particular, the risk of insufficient revenue to cover liabilities. Accordingly, the task of assessing the degree of operational risk arises. It should be remembered that any change in sales revenue generates even more significant changes in profit. This effect is commonly referred to as the Degree Operating Leverage (DOL) effect.

Obviously, an increase in sales revenue, for example, by 15% will not automatically lead to an increase in profit by the same 15%. This fact is due to the fact that the costs "behave" in different ways, i.e. the ratio between the individual components of the total cost changes, which affects the financial results of the company.

In this case, we are talking about dividing costs into fixed (Fixed Cost, FC) and variable (Variable Cost, VC) depending on their behavior in relation to the volume of production and sales.

Fixed costs - costs, the total amount of which does not change with a change in the volume of production (rent, insurance, depreciation of equipment).
Variable costs - costs, the total amount of which varies in proportion to the volume of production and sales (costs for raw materials, transportation and packaging, etc.).

It is this classification of costs, widely used in management accounting, that allows us to solve the problem of maximizing profits by reducing the share of certain costs. The dynamics of fixed costs can lead to the fact that profit will change more significantly than revenue. The above classification is to some extent conditional: some costs are of a mixed nature, fixed costs may change depending on the conditions, otherwise the costs per unit of output (unit costs) behave differently. detailed information this is presented in the special literature on management accounting. In any case, subdividing the costs into FC and VC, the concept of "relevance area" should be used. This is such an area of change in the volume of production, within which the behavior of costs remains unchanged.

Thus, the effect of operating leverage characterizes the relationship between such indicators as revenue ( RS), cost structure (FC/VC) and profit before tax and interest payments (EBIT).

In fact, DOL is the coefficient of elasticity, showing how many percent will change EBIT when it changes RS by 1%.

With the help of the operating lever, you can determine:

optimal proportions for a given company between FC And VC;
the degree of entrepreneurial risk, i.e. the rate of decline in profits with each percent reduction in sales revenue.

Really, DOL acts as a kind of "lever" that allows you to increase financial results according to the costs incurred (the reverse is also true - with an unfavorable cost structure, losses may increase). The greater the difference between additional fixed costs and the revenues they generate, the greater the leverage effect.

Example 7.1

Suppose there is information about the company "Z" for two conditional reporting periods - 2XX8 and 2XX9.

Operating profit (P r) by the end of 2XX8 will be:

If the company plans to increase revenue next year by 10%, leaving fixed costs unchanged, the profit in 2XX9 will be:

Profit Growth Rate:

With a 10% increase in revenue, profit increased much more significantly - by 20%. This is the manifestation of the operating leverage effect.

Assume that Company Z has increased its share of depreciable non-current assets, resulting in an increase in FC(due to the increase in accumulated depreciation) by 2%.

Let us determine how the rate of profit growth will change with such a change in the cost structure.

2XX9:

Calculations show that the increase FC leads to lower profit growth. Consequently, the financial management of the company should be focused on constant monitoring of the dynamics of fixed costs and reasonable savings, as a result, the entrepreneur gets the opportunity to influence the financial result. The lack of control over the cost structure will inevitably lead to significant losses even with a slight decrease in sales volumes, since with an increase in fixed costs, operating profit ( EBIT) becomes more sensitive to factors affecting revenue.

In connection with the foregoing, the following conclusions can be drawn.

The indicator of operating leverage depends on the cost structure of the company, as well as on the achieved level of sales (Q).
The higher the fixed costs, the higher DOL.
The higher the margin (RS - VC), the lower DOL.
The higher the achieved level of sales Q, the lower DOL.

To answer the question of what will be the increase in profit depending on the change in sales and revenue, they calculate an indicator called “the strength of the impact of operating leverage”.

Methods for calculating the impact force of the operating lever 1

Operating leverage is related to the level of entrepreneurial risk: the higher it is, the higher the risk. The operating lever is one of the indicators of the sensitivity of profit to changes in sales volumes (Q) or sales proceeds ( RS).

Operating lever force (Sj):

Similarly, the calculation is carried out on the volume of sales of products (works, services) in physical terms.

Dependence of the strength of the impact of the operating lever on the cost structure (S 2):

7.3. Operating leverage effect

S depends on cost structure (FC/VC) and level Q.
The higher FC, the higher S.
The higher the Q achieved, the lower the S.

Assume that the operating leverage in the analyzed company is 7.0. This means that for every 1% increase in sales, this company has a 7% increase. operating profit.

In international practice, such an analysis is interpreted as an analysis of the source of remuneration necessary to compensate investors and creditors for the risks they take on.

Example 7.2

Let's determine what will be the rate of profit growth, provided that the volume of sales increases by 50%.

Company A: T p (.EB1T) = 50 7 = 350%;

Company "B": T p(EB1T) = 50 3 = 150%.

Using this technique, it is possible to carry out variant calculations for one company with different forecast data for changes in earnings before interest and taxes (operating profit).

Obviously, the influence of operating leverage can be both positive and negative. The condition for the positive impact of operating leverage is the achievement by the company of such a level of revenue that covers all fixed costs (break even). Along with this, with a decrease in sales volumes, a negative effect of operating leverage is possible, which manifests itself in the fact that profit will decrease the faster, the higher the share of fixed costs.

There is a relationship between the strength of operating leverage (S) and the company's return on sales ( ROS):

The higher the share FC in revenue, the greater the decrease in the profitability of sales ( ROS) has a company.

Factors affecting S:

fixed costs FC;
unit variable costs VCPU;
unit price p.

Companies using a mixed scheme of business financing (having own and borrowed funds in the capital structure) are forced to control not only operational, but also financial risks. In the language of financial analysts, this is called the conjugate effect of leverage(Degree of Combined Leverage, DCL) - an indicator of the company's overall business risk (Fig. 7.2).

The conjugated effect shows how much the net profit will change when the income from sales changes by 1%. It is calculated as the product of the impact force of the financial and the impact force of the operating leverage (Fig. 7.3). Depends on the structure of expenses and the structure of business financing sources.

The larger S, the more sensitive the profit before taxation is to the change in proceeds from the sale of products (works, services). The higher F, the more sensitive net profit is to changes in profit before tax, i.e.

Rice.

with simultaneous action F And S all smaller changes in revenue lead to more significant changes in net income. This is a manifestation of the coupled effect.

When making decisions on increasing the share of fixed costs in the company's cost structure and the advisability of attracting borrowed funds, it is necessary to focus on the sales forecast. In doing so, you can use

Rice. 7.3. Calculation of the force of leverage in calculations, the value of marginal income, which is the difference between revenue and variable costs (it is also called contribution to cover fixed costs).

Derivation of the formula of the coupled effect in terms of contribution margin 1:

where Q - sales volume; CM - marginal income.

With a favorable forecast for sales growth, it is advisable to increase the share of fixed costs and borrowed capital in order to increase the level DCL and get an increase in net profit in DCL times greater than the relative increase in sales volume.

With an unfavorable forecast for changes in sales volume Q, it is advisable to increase the share of variable costs, reduce fixed costs and borrowed capital, and thereby lower the level DCL.

As a result, a relative decrease N1 as Q decreases, it becomes smaller.

Example 7.3

The trading company increased its sales volume (Q) from 80 units. up to 100 units At the same time, the structure of financing, costs and prices did not change.

The selling price of a unit of production Р = 20 rubles.

fixed costs FC= 600 rub.

Variable costs for 1 unit. VC= 5 rub.

Interest payments I= 100 rub.

Income tax rate D = 20%.

Determine how the change in sales under the above conditions affected the value of the company's net profit.




	1600 - 400 = 1200

		1500 - 600 = 900


	20 500 = (100)	20 800 = (160)

Sales revenue increased by 25% (2000 -1600/1600) and the company's net income increased by 75% (25% 3).

Thus, the use of management analysis elements in the process of assessing the dynamics of the company's performance indicators allows managers to minimize operational and financial risks by determining the optimal this stage life cycle cost structure and capital.

The effect of operating leverage is the presence of a relationship between a change in sales proceeds and a change in profit. The strength of operating leverage is calculated as the quotient of sales revenue after recovering variable costs to earnings. Operating leverage generates entrepreneurial risk.

The effect of operating leverage (strength of impact) is determined by the percentage change in operating profit with a one percent change in sales volume from a fixed level Q. The assessment of the effect is based on the general concept of elasticity

A number of indicators are used to calculate the effect or strength of a lever. This requires the separation of costs into variables and constants with the help of an intermediate result. This value is usually called the gross margin, the amount of coverage, the contribution.

These metrics include:

gross margin = profit from sales + fixed costs;

contribution (coverage amount) = sales proceeds - variable costs;

leverage effect = (sales revenue - variable costs) / sales profit.

Operating leverage is manifested in cases where the company has fixed costs, regardless of the volume of production (sales). In the short run, unlike fixed costs, variable costs can change under the influence of adjustments in the volume of production (sales). In the long run, all costs are variable.

The effect of production leverage arises from the heterogeneous cost structure of the enterprise. The change in variable costs is directly proportional to the change in production volume and sales revenue, and fixed costs over a fairly long period of time almost do not respond to changes in production volume. A sharp change in the amount of fixed costs occurs due to a radical restructuring organizational structure enterprises during periods of mass replacement of fixed assets and quality

"technological leaps". Thus, any change in sales revenue generates an even stronger change in carrying profit.

The strength of the impact of the production lever depends on the proportion of fixed costs in the total cost of the enterprise.

The effect of production leverage is one of the most important indicators of financial risk, as it shows how much the balance sheet profit will change, as well as the economic profitability of assets when the volume of sales or proceeds from the sale of products (works, services) changes by one percent.

In practical calculations, to determine the strength of the impact of the operating lever on a particular enterprise, the result from the sale of products after reimbursement will be used. variable costs(VC), which is often referred to as contribution margin:

MD=OP-VC
where OP is the volume of sales, goods; VC - variable costs.

where FC - fixed costs; EBIT - operating income (profit from sales - before deducting interest on a loan and income tax).

Cmd=MD/OP,
where KMD is the coefficient of marginal income, fractions of a unit.

It is desirable that marginal income not only covers fixed costs, but also serves as a source of operating profit (EBIT) /

After calculating the marginal income, you can determine the strength of the impact of the production leverage (PLL):

SVPR=MD/EBIT
This ratio expresses how many times marginal income exceeds operating profit.

The strength of the operating leverage is always calculated for a certain volume of sales. As sales revenue changes, so does its impact. The operating lever allows you to assess the degree of influence of changes in sales volumes on the size of the organization's future profits. Operating leverage calculations show how much profit will change if sales volume changes by 1%.

The effect of operating leverage is that any change in sales revenue (due to a change in volume) leads to an even stronger change in profit. The action of this effect is associated with the disproportionate influence of fixed and variable costs on the result of the financial and economic activity of the enterprise when the volume of production changes.

The strength of the impact of the operating lever shows the degree of entrepreneurial risk, that is, the risk of loss of profit associated with fluctuations in the volume of sales. The greater the effect of operating leverage (the greater the proportion of fixed costs), the greater the entrepreneurial risk.

Thus, modern cost management involves quite diverse approaches to accounting and analysis of costs, profits, business risk. You have to master these interesting tools to ensure the survival and development of your business.

Operating leverage is a mechanism for managing the profit of an organization based on optimizing the ratio of fixed and variable costs.

With it, you can predict the change in profit depending on the change in sales volume.

The operation of operating leverage is manifested in the fact that any change in revenue from the sale of products always generates a stronger change in profit.

Example:

Profit always grows faster if the same proportions between constants and variables are maintained.

If fixed costs increase by only 5%, then the profit growth rate will be 34%.

Solving the problem of maximizing the rate of profit growth, you can control the increase or decrease of not only variable but also fixed costs and, depending on this, calculate how much% the profit will increase.

In practical calculations, the indicator of the effect of the operating leverage (the force of the operating leverage) is used. ESM is a quantitative assessment of the change in profit depending on the change in the volume of sales. It shows by how much% profit will change with a change in revenue by 1%. Or it shows how many times the profit growth rate is higher than the revenue growth rate.

The effect of operating leverage is related to the level of entrepreneurial risk. The higher it is, the higher the risk. Since with its increase, the critical volume of sales increases and the margin of financial strength decreases.

EOR = = = = 8.5 (times)

ESM = = = 8.5 (%/%)

Using the concept of operating leverage to compare cost allocation options.

Sometimes it is possible to transfer part of the variable costs to the category of fixed ones (ie, change the structure) and vice versa. In this case, it is necessary to determine how the redistribution of costs within a constant amount of total costs will affect financial indicators in order to assess risks.

ZFP \u003d (Vf - Vkr) / Vf

Operating leverage effect

Entrepreneurial activity is associated with many factors. All of them can be divided into two groups. The first group of factors is related to profit maximization. Another group of factors is associated with the identification of critical indicators in terms of the volume of products sold, the best combination of marginal revenue and marginal costs, with the division of costs into variable and fixed. The effect of operating leverage is that any change in sales revenue always generates a larger change in earnings.

In modern conditions at Russian enterprises, the issues of mass regulation and profit dynamics come to one of the first places in the management of financial resources. The solution of these issues is included in the scope of operational (production) financial management.

The basis of financial management is financial economic analysis, within which the analysis of the cost structure comes to the fore.

It is known that entrepreneurial activity associated with many factors influencing its outcome. All of them can be divided into two groups. The first group of factors is associated with profit maximization through supply and demand, pricing policy, product profitability, and its competitiveness. Another group of factors is associated with the identification of critical indicators in terms of the volume of products sold, the best combination of marginal revenue and marginal costs, with the division of costs into variable and fixed.

Variable costs that change with changes in the volume of output include raw materials and materials, fuel and energy for technological purposes, purchased products and semi-finished products, the main wage the main production workers, the development of new types of products, etc. Fixed (company-wide) costs - depreciation, rent, salaries of the administrative and managerial apparatus, interest on loans, travel expenses, advertising costs, etc.

The analysis of production costs allows you to determine their impact on the amount of profit from sales, but if you go deeper into these problems, it turns out the following:

- such a division helps to solve the problem of increasing the mass of profit due to the relative reduction of certain costs;

- allows you to search for the most optimal combination of variable and fixed costs, providing an increase in profit;

- allows you to judge the cost recovery and financial stability in the event of a deterioration in the economic situation.

The following indicators can serve as a criterion for choosing the most profitable products:

- gross margin per unit of production;

- the share of gross margin in the price of a unit of production;

– gross margin per unit of limited factor.

Considering the behavior of variable and fixed costs, one should analyze the composition and structure of costs per unit of output in a certain period of time and with a certain number of sales. This is how the behavior of variable and fixed costs is characterized when the volume of production (sales) changes.

Table 16 - Behavior of variable and fixed costs when changing the volume of production (sales)

The cost structure is not so much a quantitative relationship as a qualitative one. Nevertheless, the influence of the dynamics of variable and fixed costs on the formation of financial results with a change in production volume is very significant. Operating leverage is closely related to the cost structure.

The effect of operating leverage is that any change in sales revenue always generates a larger change in earnings.

These metrics include:

gross margin = profit from sales + fixed costs;

contribution (coverage amount) = sales proceeds - variable costs;

leverage effect = (sales revenue - variable costs) / sales profit.

If we interpret the effect of the operating leverage as a change in the gross margin, then its calculation will allow us to answer the question of how much the profit changes from an increase in the volume (production, sales) of products.

Revenue changes, leverage changes. For example, if the leverage is 8.5, and revenue growth is planned at 3%, then profit will increase by: 8.5 x 3% = 25.5%. If revenue falls by 10%, then profit decreases by: 8.5 x 10% = 85%.

However, with each increase in sales revenue, the leverage changes and profits increase.

Let's move on to the next indicator, which follows from the operational analysis - the threshold of profitability (or break-even point).

The threshold of profitability is calculated as the ratio of fixed costs to the gross margin ratio:

Gross Margin = Gross Margin / Sales Revenue

profitability threshold = fixed costs / gross margin

The next indicator is the margin of financial strength:

Margin of financial strength \u003d sales proceeds - profitability threshold.

The size of financial strength shows that the company has a margin of financial stability, and hence profit. But the lower the difference between revenue and profitability threshold, the greater the risk of losses. So:

the strength of the impact of the operating lever depends on the relative magnitude of fixed costs;

the strength of the operating leverage is directly related to the growth in sales volume;

the force of the impact of the operating leverage is the higher, the closer the enterprise is to the threshold of profitability;

the strength of the impact of the operating lever depends on the level of capital intensity;

the strength of the impact of operating leverage is stronger, the lower the profit and the higher the fixed costs.

Calculation example

Initial data:

Proceeds from the sale of products - 10,000 thousand rubles.

Variable costs - 8300 thousand rubles,

Fixed costs - 1500 thousand rubles.

Profit - 200 thousand rubles.

1. Calculate the force of the operating leverage.

Coverage amount = 1500 thousand rubles. + 200 thousand rubles. = 1700 thousand rubles.

Operating lever force = 1700 / 200 = 8.5 times,

Assume that next year sales are projected to grow by 12%. We can calculate by what percentage the profit will increase:

12% * 8,5 =102%.

10000 * 112% / 100= 11200 thousand rubles

8300 * 112% / 100 = 9296 thousand rubles.

11200 - 9296 \u003d 1904 thousand rubles.

1904 - 1500 = 404 thousand rubles

Lever force = (1500 + 404) / 404 = 4.7 times.

From here, profit increases by 102%:

404 — 200 = 204; 204 * 100 / 200 = 102%.

Let's define the profitability threshold for this example. For these purposes, the gross margin ratio should be calculated. It is calculated as the ratio of gross margin to sales revenue:

1904 / 11200 = 0,17.

Knowing the gross margin ratio - 0.17, we consider the profitability threshold.

Profitability threshold \u003d 1500 / 0.17 \u003d 8823.5 rubles.

Analysis of the cost structure allows you to choose a strategy of behavior in the market. There is a rule when choosing profitable assortment policy options - the 50:50 rule.

Cost management in connection with the use of the effect of operating leverage allows you to quickly and comprehensively approach the use of enterprise finances. You can use the 50/50 rule for this.

All types of products are divided into two groups depending on the share of variable costs. If it is more than 50%, then it is more profitable for the given types of products to work on reducing costs. If the share of variable costs is less than 50%, then it is better for the company to increase sales volumes - this will give more gross margin.

Having mastered the cost management system, the company receives the following benefits:

- the ability to increase the competitiveness of manufactured products (services) by reducing costs and increasing profitability;

– to develop a flexible pricing policy, on its basis to increase turnover and oust competitors;

– save the material and financial resources of the enterprise, obtain additional working capital;

- to evaluate the efficiency of the company's divisions, staff motivation.

Operating leverage (production leverage) is a potential opportunity to influence the company's profit by changing the cost structure and production volume.

The effect of operating leverage is that any change in sales revenue always leads to a larger change in profit. This effect is caused by varying degrees of influence of the dynamics of variable costs and fixed costs on the financial result when the volume of output changes. By influencing the value of not only variable, but also fixed costs, you can determine by how many percentage points the profit will increase.

The level or strength of the impact of the operating leverage (Degree operating leverage, DOL) is calculated by the formula:

D OL = MP/EBIT = ((p-v)*Q)/((p-v)*Q-FC)

MP - marginal profit;

EBIT - earnings before interest;

FC - semi-fixed production costs;

Q is the volume of production in natural terms;

p is the price per unit of production;

v - variable costs per unit of production.

The level of operating leverage allows you to calculate the percentage change in profit depending on the dynamics of sales by one percentage point. In this case, the change in EBIT will be DOL%.

The greater the share of the company's fixed costs in the cost structure, the higher the level of operating leverage, and hence the greater the business (production) risk.

As revenue moves away from the break-even point, the impact of operating leverage decreases, and the organization's financial strength, on the contrary, grows. This feedback is associated with a relative decrease in the fixed costs of the enterprise.

Since many enterprises produce a wide range of products, it is more convenient to calculate the level of operating leverage using the formula:

DOL = (S-VC)/(S-VC-FC) = (EBIT+FC)/EBIT

where S is sales proceeds; VC - variable costs.

The level of operating leverage is not constant value and depends on a certain, underlying implementation value. For example, with a breakeven volume of sales, the level of operating leverage will tend to infinity. Operating lever level has highest value at a point just above the breakeven point. In this case, even a slight change in sales leads to a significant relative change in EBIT. The change from zero profit to any profit represents an infinite percentage increase.

In practice, those companies that have a large share of fixed assets and intangible assets (intangible assets) in the balance sheet structure and large management expenses have a large operating leverage. Conversely, the minimum level of operating leverage is inherent in companies that have a large share of variable costs.

Thus, understanding the mechanism of operation of production leverage allows you to effectively manage the ratio of fixed and variable costs in order to increase the profitability of the company's operations.

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The process of financial management, as you know, is associated with the concept of leverage. Leverage is a factor, a small change in which can lead to a significant change in performance. The operating lever uses the relationship ʼʼcosts - production volume - profitʼʼ, ᴛ.ᴇ. it implements in practice the possibility of optimizing profits by managing costs, the ratio of their constant and variable components.

The operating leverage effect is manifested in the fact that any change in the costs of the enterprise always generates a change in revenue and an even stronger change in profits.

1. Revenue from product sales in the current period is

2. The actual costs that led to the receipt of this revenue,

formed in the following volumes:

- variables - 7,500 rubles;

- permanent - 1500 rubles;

- total - 9,000 rubles.

3. Profit in the current period - 1000 rubles. (10,000 - 7500-1500).

4. Suppose that the proceeds from the sale of products in the next period will increase to 110,000 (+10%).

Then the variable costs, according to the rules of their movement, will also increase by 10% and amount to 8,250 rubles. (7500 + 750).

6. Fixed costs according to the rules of their movement remain the same -1500 rubles.

7. The total costs will be equal to 9,750 rubles. (8 250 + 1500).

8. Profit in this new period will be 1,250 rubles. (11 LLC - 8,250 - 500), which is 250 rubles. and 25% more profit of the previous period.

The example shows that a 10% increase in revenue led to a 25% increase in profits. This increase in profits is the result of the effect of operating (production) leverage.

Operating lever force- This is an indicator used in practice when calculating the rate of profit growth. The following algorithms are used to calculate it:

Operating Leverage = Gross Margin / Profit;

Gross Margin = Sales Revenue - Variable Costs.

Example. We use the digital information of our example and calculate the value of the indicator of the force of the impact of the operating lever:

(10 000 — 7500): 1000 = 2,5.

The obtained value of the impact force of the operating lever (2.5) shows how many times the profit of the enterprise will increase (decrease) with a certain increase (decrease) in revenue.

With a possible decrease in revenue by 5%, profit will decrease by 12.5% (5 × 2.5). And with an increase in revenue by 10% (as in our example), profit will increase by 25% (10 × 2.5), or by 250 rubles.

The impact of operating leverage is greater, the higher the proportion of fixed costs in the total cost.

The practical significance of the effect of operating leverage essentially consists in the fact that, by setting one or another rate of growth in the volume of sales, it is possible to determine in what sizes the amount of profit will increase with the strength of the operating lever that has developed at the enterprise. Differences in the effect achieved at enterprises will be determined by differences in the ratio of fixed and variable costs.

Understanding the mechanism of operation of the operating lever allows you to purposefully manage the ratio of fixed and variable costs in order to improve the efficiency of the current activities of the enterprise. This management is reduced to changing the value of the strength of the operating lever under various trends in the commodity market and stages of the life cycle of the enterprise:

In case of unfavorable commodity market conditions, as well as on early stages the life cycle of an enterprise, its policy should be aimed at reducing the strength of the operating lever by saving fixed costs;

With favorable market conditions and with a certain margin of safety, savings in fixed costs should be significantly reduced. During such periods, the enterprise can expand the volume of real investments by modernizing the basic production assets.