Definition of Degree Of Operating Leverage
The degree of operating leverage (DOL) is a ratio that gives a clear idea about the change in the company’s operating income by adjusting or changing the sales of the company against a financial year, on the quarter or monthly basis. Fixed costs and variable costs that are associated with the manufacturing process are included in the company’s operating leverage cost against the sales made in the defined period. Fixed costs don’t change with production like machine or building while variable costs change with production volumes like labour or material.
While calculating the operating leverage ratio, we can calculate it using the contribution margin. Contribution margin is calculated by taking a difference between the total sales and variable cost.