FINANCE / COST STRUCTURE
Measure operating-income sensitivity from revenue, variable costs, and fixed operating costs at one activity level.
METHOD / WORKED EXAMPLE
This ratio helps test how a small sales change could amplify operating income around one activity level.
WORKED DEFAULT
With revenue of $1,000,000, variable costs of $600,000, and fixed operating costs of $250,000, contribution margin is $400,000, EBIT is $150,000, and DOL is 2.6667.
READ THE RESULT
A DOL of 2.6667 means the model estimates roughly a 2.67% EBIT change for a 1% sales change near the entered level. It does not describe a large change or guarantee linear behavior.
ASSUMPTIONS AND LIMITS
DOL changes with activity level and assumes selling price, unit mix, and cost behavior stay constant around that point.
COMMON QUESTIONS
EBIT becomes small near break-even while contribution margin remains positive, so dividing contribution margin by EBIT produces a larger ratio. The estimate is highly sensitive there and should be read only for small changes around the entered sales level.
No. Degree of operating leverage isolates the operating cost structure before financing. Use the financial or combined leverage calculator when interest expense is part of the question.
Use caution. Companies may classify costs differently and operate at different sales levels or product mixes. Compare aligned periods and accounting definitions, then inspect contribution margin and EBIT alongside the ratio.
RELATED TOOLS
Use boundary
The calculator derives contribution margin and EBIT, then divides contribution margin by EBIT at the entered sales level.
DOL = (revenue - variable costs) / (revenue - variable costs - fixed operating costs).