Operating leverage is a measure of the degree to which fixed costs are used in the production process. A company with a higher percentage of fixed costs (higher operating leverage) has greater risk than one in the same industry that relies more heavily on variable costs. The DOL equals the percentage change in net operating income divided by the percentage change in sales. Thus, profits become more sensitive to changes in sales volume as the DOL increases.
Because a firm with higher leverage is more risky. Its reliance on fixed costs is greater.
Because a firm with higher operating leverage has higher fixed costs and lower variable costs.
Because a firm with higher leverage will be relatively more profitable than a firm with lower leverage when sales are high. The opposite is true when sales are low.
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