Operating lever. Calculation formula

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. The action of the operating lever 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 the volume of production and sales proceeds, and fixed costs over quite long period time almost do not react to changes in the volume of production. 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 greater change in profit. Action this effect due to the disproportionate impact of fixed and variable costs on the result of the financial and economic activity of the enterprise with a change in production volume.

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 (operating leverage) shows how many times the rate of change in sales profit exceeds the rate of change in sales revenue. Knowing operating lever it is possible to predict the change in profit with a change in revenue.

The minimum amount of revenue required to cover all expenses is called breakeven point, in turn, how much revenue can decrease so that the enterprise works without losses shows margin of financial strength.

A change in revenue can be caused by a change in price, a change in physical volume of sales, and a change in both of these factors.

Let us introduce the notation:

Price operating leverage calculated by the formula:

Rts \u003d (P + Zper + Zpost) / P \u003d 1 + Zper / P + Zpost / P
Natural operating lever calculated by the formula:

Rn \u003d (V-Zper) / P

Considering that B \u003d P + Zper + Zpost, we can write:

Rn \u003d (P + Zpost) / P \u003d 1 + Zpost / P

Comparing formulas for operating leverage in price and in kind it can be noticed that pH has less impact. This is explained by the fact that with an increase in natural volumes, variable costs simultaneously grow, and with a decrease, they decrease, which leads to a slower increase / decrease in profit.

The effect of operating (production) leverage is that any change in sales revenue always generates a stronger change in profit. 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 effect is caused by varying degrees of influence of the dynamics of variable costs and fixed costs on financial results 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. In other words, the effect of the production lever shows the degree of sensitivity of the profit from the sale to the change in the proceeds from the sale.

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

DOL = MP/EBIT = ((p-v)*Q)/((p-v)*Q-FC),

where MP - marginal profit; EBIT - earnings before interest; FC - semi-fixed production costs; Q is the volume of production in physical terms; p - price per unit of production; v - variable costs per unit of output.

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 consequently, 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 fixed costs enterprises.

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 EBIT+FC =MP, S - sales proceeds; VC - variable costs.

The calculation of the effect of production calculation allows answering the question of how sensitive the marginal income is to changes in the volume of production and sales, and how much it would be enough not only to cover fixed costs but also profit generation. It should also be noted that, the impact force of the operating lever:

Depends on the relative value of fixed costs, on the structure of the company's assets, the share of non-current assets. The greater the value of fixed assets, the greater the share of fixed costs;

Directly related to the growth in sales volume;

The higher, the closer the enterprise is to the threshold of profitability;

Depends on the level of capital intensity;

The stronger, the lower the profit and the higher the fixed costs.

The level of operating leverage is not a constant value and depends on a certain, basic 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 profitability. operational activities companies.

The following conclusions can be drawn:

High specific gravity fixed costs narrows the boundaries of mobile management of current costs;

The greater the force of operating leverage, the higher the entrepreneurial risk.

• Gurfova Svetlana Adalbievna, Candidate of Sciences, Associate Professor, Associate Professor
• Kabardino-Balkarian State Agrarian University named after V.I. V.M. Kokova

• OPERATING LEVER POWER
• OPERATING LEVER
• VARIABLE COSTS
• OPERATIONAL ANALYSIS
• FIXED COSTS

The ratio "Volume - Costs - Profit" allows you to quantify changes in profit depending on sales volume based on the mechanism of operating leverage. The operation of this mechanism is based on the fact that profit always changes faster than any change in the volume of production, due to the presence of fixed costs as part of operating costs. In the article with an example industrial enterprise the magnitude of the operating leverage and the strength of its impact are calculated and analyzed.

• Characteristics of approaches to the definition of the concept of "financial support of the organization"
• Financial and economic state of Kabarda and Balkaria in the post-war period
• Features of the nationalization of industrial and commercial enterprises in Kabardino-Balkaria
• Influence of the sustainability of agricultural formations on the development of rural areas

One of the most effective methods financial analysis for the purpose of operational and strategic planning is an operational analysis, which characterizes the relationship of financial performance with costs, production volumes and prices. It helps to identify the optimal proportions between variable and fixed costs, price and sales volume, minimizing entrepreneurial risk. Operational analysis, being an integral part management accounting, helps the financiers of the enterprise to get answers to many of the most important questions that arise before them at almost all the main stages of the organization's cash flow. Its results may constitute a trade secret of the enterprise.

The main elements of operational analysis are:

• operating lever (leverage);
• profitability threshold;
• stock of financial strength of the enterprise.

Operating leverage is defined as the ratio of the rate of change in sales profit to the rate of change in sales revenue. It is measured in times, shows how many times the numerator is greater than the denominator, that is, it answers the question of how many times the rate of change in profit exceeds the rate of change in revenue.

Let's calculate the amount of operating leverage based on the data of the analyzed enterprise - JSC "NZVA" (Table 1).

Table 1. Calculation of the operating leverage at OJSC NZVA

Calculations show that in 2013. the rate of change in profit was approximately 3.2 times higher than the rate of change in revenue. In fact, both revenue and profit changed upwards: revenue - by 1.24 times, and profit - by 2.62 times compared to the level of 2012. At the same time, 1.24< 2,62 в 2,1 раза. В 2014г. прибыль уменьшилась на 8,3%, темп ее изменения (снижения) значительно меньше темпа изменения выручки, который тоже невелик – всего 0,02.

For each specific enterprise and each specific planning period, there is its own level of operating leverage.

When a financial manager aims to maximize the rate of profit growth, he can influence not only variable costs, but also fixed costs by applying increment or decrement procedures. Depending on this, he calculates how the profit has changed - increased or decreased - and the magnitude of this change as a percentage. In practice, to determine the strength of operating leverage, a ratio is used in which the numerator is sales revenue minus variable costs (gross margin), and the denominator is profit. This figure is often referred to as the coverage amount. It is necessary to strive to ensure that the gross margin covers not only fixed costs, but also forms a profit from sales.

To assess the impact of a change in sales revenue on profit, expressed as a percentage, the percentage of revenue growth is multiplied by the strength of the impact of operating leverage (COR). Let's determine the SVOR at the assessed enterprise. The results are presented in the form of table 2.

Table 2. Calculation of the force of the impact of the operating lever on JSC "NZVA"

As shown in Table 2, the amount of variable costs for the analyzed period increased steadily. Yes, in 2013. it amounted to 138.9 percent compared to the level of 2012, and in 2014. - 124.2% compared to the level of 2013. and 172.5% to the level of 2012. The share of variable costs in the total costs for the analyzed period is also steadily increasing. Share of variable costs in 2013 increased compared to 2012. from 48.3% to 56%, and in 2014. - another 9 percentage points compared to the previous year. The force with which the operating lever acts steadily decreases. In 2014 it decreased by more than 2 times compared with the beginning of the analyzed period.

From the point of view of the financial management of the organization's activities, net profit is a value dependent on the level rational use financial resources enterprises, i.e. the direction of investment of these resources and the structure of sources of funds are very important. In this regard, the volume and composition of the main and working capital and the effectiveness of their use. Therefore, the change in the level of strength of the operating leverage was also influenced by the change in the structure of the assets of NZVA OJSC. In 2012 the share of non-current assets in the total assets amounted to 76.5%, and in 2013. it increased to 92%. The share of fixed assets accounted for 74.2% and 75.2%, respectively. In 2014 the share of non-current assets decreased (to 89.7%), but the share of fixed assets increased to 88.7%.

Obviously, the greater the proportion of fixed costs in total costs, the more greater strength the production lever operates and vice versa. This is true when sales revenue increases. And if sales revenue decreases, then the force of production leverage, regardless of the share of fixed costs, increases even faster.

Thus, we can conclude that:

• the structure of the organization's assets, the share of non-current assets, has a significant impact on the SVOR. With the growth of the cost of fixed assets, the proportion of fixed costs increases;
• a high proportion of fixed costs limits the ability to increase the flexibility of current cost management;
• with the increase in the force of the impact of the production lever, the entrepreneurial risk increases.

The SVOP formula helps answer the question of how sensitive the gross margin is. Later, by rearranging this formula one by one, we will be able to determine the strength of operating leverage based on price and unit variable costs, and total amount fixed costs.

The strength of the impact of operating leverage, as a rule, is calculated for a known volume of sales, for a given specific sales proceeds. With a change in sales revenue, the strength of the impact of operating leverage also changes. SIDS is largely determined by the influence of the average industry level of capital intensity as an objective factor: with the growth in the cost of fixed assets, fixed costs increase.

However, the effect of production leverage can still be controlled using the dependence of the SVOP on the amount of fixed costs: with an increase in fixed costs and a decrease in profit, the effect of the operating lever increases, and vice versa. This can be seen from the transformed formula for the force of the operating lever:

VM / P \u003d (Z post + P) / P, (1)

where VM– gross margin; P- profit; Z post- fixed costs.

The strength of operating leverage increases with an increase in the share of fixed costs in the gross margin. At the analyzed enterprise in 2013. the share of fixed costs decreased (since the share of variable costs increased) by 7.7%. Operating leverage decreased from 17.09 to 7.23. In 2014 - the share of fixed costs decreased (with an increase in the share of variable costs) by another 11%. Operating leverage also decreased from 7.23 to 6.21.

With a decrease in sales revenue, an increase in SVOR occurs. Each percentage decrease in revenue causes an increasing decrease in profits. This reflects the strength of the operating leverage.

If, on the other hand, sales revenue increases, but the break-even point has already been passed, then the operating leverage decreases, and faster and faster with each percentage increase in revenue. At a small distance from the threshold of profitability, the SRR will be maximum, then it will start to decrease again until the next jump in fixed costs with the passage of a new point of cost recovery.

All these points can be used in the process of forecasting income tax payments when optimizing tax planning, as well as in developing detailed components of the company's commercial policy. If the expected dynamics of sales revenue is sufficiently pessimistic, then fixed costs cannot be increased, since the decrease in profit from each percentage decrease in sales revenue can become many times greater as a result of the cumulative effect caused by the influence of large operating leverage. However, if an organization assumes an increase in demand for its goods (works, services) in the long term, then it can afford not to save heavily on fixed costs, since a large share of them is quite capable of providing a higher increase in profits.

In circumstances that contribute to a decrease in the income of the enterprise, it is very difficult to reduce fixed costs. In other words, a high proportion of fixed costs in their total amount indicates that the enterprise has become less flexible, and, therefore, more weakened. Organizations often feel the need to move from one area of ​​activity to another. Of course, the possibility of diversification is at the same time a tempting idea, but also very difficult in terms of organization, and especially in terms of finding financial resources. The higher the cost of tangible fixed assets, the more reasons the company has to stay in its current market niche.

In addition, the state of the enterprise with a high share of fixed costs significantly increases the effect of operating leverage. In such conditions, a decrease in business activity means for the organization a multiplied loss of profit. However, if the revenue is growing at a sufficiently high rate, and the company has a strong operating leverage, then it will be able not only to pay the necessary amounts of income tax, but also to provide good dividends and adequate funding for its development.

SVOR indicates the degree of entrepreneurial risk associated with a given business entity: the greater it is, the higher the entrepreneurial risk.

In the presence of a favorable market situation, an enterprise characterized by a greater strength of the operating leverage (high capital intensity) receives an additional financial gain. However, capital intensity should be increased only in the case when an increase in the volume of sales of products is really expected, i.e. with great care.

Thus, by changing the growth rate of sales volume, it is possible to determine how the amount of profit will change with the force of operating leverage that has developed at the enterprise. The effects achieved at enterprises will vary depending on variations in the ratio of fixed and variable costs.

We have considered the mechanism of operation of the operating lever. Its understanding allows for targeted management of the ratio of fixed and variable costs and, as a result, to improve the efficiency of the current activities of the enterprise, which in fact involves the use of changes in the value of the strength of the operating lever under various market trends commodity market and different stages of the cycle of functioning of an economic entity.

When the commodity market conditions are not favorable, and the enterprise is in the early stages life cycle, in its policy it is necessary to identify possible measures that will help reduce the strength of operating leverage by saving fixed costs. With favorable market conditions and when the enterprise is characterized by a certain margin of safety, the work on saving fixed costs can be significantly weakened. During such periods, the enterprise may be recommended to expand the volume of real investments on the basis of the comprehensive modernization of fixed production assets. Fixed costs are much more difficult to change, so businesses with great strength operating leverage are no longer flexible enough, which negatively affects the effectiveness of the cost management process.

SWOR, as already noted, is significantly influenced by relative value fixed costs. For enterprises with heavy basic production assets, high values indicator of the strength of the operating lever is very dangerous. In the process of an unstable economy, when customers are characterized by low effective demand, when the strongest inflation takes place, every percent reduction in sales revenue entails a catastrophic wide-ranging drop in profits. The company is in the loss zone. Management is, as it were, blocked, that is, the financial manager cannot use for the most part options for choosing the most effective and productive management and financial decisions.

The introduction of automated systems relatively weighs down fixed costs in the unit cost of production. Indicators react differently to this circumstance: gross margin ratio, profitability threshold and other elements of operational analysis. Automation, with all its advantages, contributes to the growth of entrepreneurial risk. And the reason for this is the tilt of the cost structure towards fixed costs. When an enterprise implements automation, it should carefully weigh its investment decisions. It is necessary to have a well-thought-out long-term strategy for the organization. Automated production, having, as a rule, a relatively low level of variable costs, increases operating leverage as a measure of the involvement of fixed costs. And because of the higher profitability threshold, the margin of financial safety is usually lower. So general level The risk associated with production and economic activities is higher with the intensification of capital than with the intensification of direct labor.

However, automated production requires great opportunities for effective management cost structure than when using predominantly manual labor workers. If there is a wide choice, the business entity must independently determine what is more profitable to have: high variable costs and low fixed costs, or vice versa. It is not possible to unequivocally answer this question, since any option is characterized by both advantages and disadvantages. The final choice will depend on the initial position of the analyzed enterprise, what financial goals it intends to achieve, what are the circumstances and features of its functioning.

Bibliography

1. Blank, I.A. Encyclopedia financial manager. T.2. Management of assets and capital of the enterprise / I.A. Form. - M .: Publishing house "Omega-L", 2008. - 448 p.
2. Gurfova, S.A. - 2015. - V. 1. - No. 39. - P. 179-183.
3. Kozlovsky, V.A. Production and operational management / V.A. Kozlovsky, T.V. Markina, V.M. Makarov. - St. Petersburg: Special Literature, 1998. - 336 p.
4. Lebedev, V. G. Cost management at the enterprise / V. G. Lebedev, T. G. Drozdova, V. P. Kustarev. - St. Petersburg: Peter, 2012. - 592 p.

Operating leverage (or, as it is also called, operating leverage) is one of the main economic indicators. It not only makes it possible to assess the current situation, but is also actively used in forecasting. Perhaps the most important operational leverage is in the context of determining economic risks in a particular period.

Operating Lever - Definition

There are many various criteria, by which it is possible to determine the economic condition of the enterprise. Thus, the operating leverage is an indicator that demonstrates the dependence of the dynamics of changes in the rate of profit on revenue. An important role here is played by such a concept as the break-even point, which denotes the minimum amount of revenue that covers all production costs. It is also worth considering the factors that affect the dynamics of the second indicator. It can be both price fluctuations and changes in the volume of demand.

The concept of operating leverage is inextricably linked with the share of fixed costs in total production costs. This is what determines the sensitivity of profit to revenue. The lower the fixed costs, the more active the dynamics of the first value in relation to the second.

Operating Lever Features

An indicator such as operating leverage is characterized by a number of distinctive features. Among them, it is worth highlighting the following:

• It will be appropriate to determine the effect of operating leverage only when the organization has stepped over the break-even point in its activities. This can be explained by the fact that, regardless of the amount of income received, the company is obliged to repay the costs that are fixed.
• As the volume of product sales increases, and, accordingly, revenue, the significance of the operating lever gradually decreases. Since the company has already overcome the zero (break-even) level, profit will also continuously increase with income growth. And vice versa.
• The relationship between profit and operating leverage is inverse. Thus, we can say that this indicator somehow equalizes the values ​​of profitability and risk.
• The effect of operating leverage is only fair for the short term. This can be explained by the fact that fixed costs gradually change due to fluctuations in tariffs and other factors.

Techniques for reducing fixed costs

In order to reduce the share of fixed costs in their total amount, the following techniques can be used:

• reducing the cost of maintaining the administrative apparatus;
• sale or lease of equipment that is idle in order to reduce depreciation and maintenance costs;
• not to burden the budget large quantity expenses, you can take production machines on lease;
• saving resources and reducing utility bills.

How to save on variable costs

Since variable costs also affect the final operating leverage, it is worth taking some measures in production to reduce them:

• reducing the number of personnel by automating all processes or increasing labor productivity in other ways;
• rationalization of warehousing by reducing stocks, which will reduce the cost of their storage and maintenance;
• revision of the logistics system in favor of more profitable delivery methods.

Operating leverage calculation

It makes it possible to evaluate the change in profit as a percentage with fluctuations in costs and revenues such an indicator as operating leverage. Its formula is the ratio of marginal profit to the profit that was received before deducting the corresponding interest payments. We can say that this is a characteristic of the change in profit for each percentage point of increase in the level of sales.

There is another way in which operating leverage can be calculated. The formula will be valid for those enterprises that produce a wide range of product names. So, this indicator is calculated as the ratio between:

• the difference between revenue and variable costs;
• the difference between revenue, variable costs and semi-fixed costs.

If the head of the enterprise fully understands the mechanism of action this indicator, then he has the ability to manipulate costs in order to increase the value of the profit indicator.

Operating lever properties

This indicator has the following properties:

• the impact and size of the operating leverage are directly proportional to fixed costs and inversely proportional to variables;
• the highest indicator of operating leverage is when the sales volume is close to the break-even point (this indicates high level risk);
• despite the fact that the low value of operating leverage is characterized by low risk, it is worth noting that in this case one should not count on significant profit either.

Lever force

The strength of the impact of operating leverage depends on the proportion of fixed costs in the total costs of the enterprise. This is one of the most important indicators according to which the level of risk can be determined. entrepreneurial activity. It reflects fluctuations in earnings depending on sales volume and income. To determine this indicator, you must first calculate the marginal income.

The strength of the operating leverage is determined based on the specific quantity of products produced. So, you can determine the risk of losing profits due to fluctuations in sales volumes. We can say that the strength of the operating leverage and the probability of incurring losses are directly proportional.

The calculation of the operating leverage indicator is an objective necessity for carrying out qualitative analysis enterprise work. It will allow timely identification of all risks and shortcomings in the marketing organization in order to minimize the likelihood of financial losses and bankruptcy.

Operating lever options

There are several options according to which this indicator can be calculated. So the operating leverage is:

• the ratio of fixed and variable costs, which significantly affects the profitability of the enterprise;
• the ratio of the rate of change in retained earnings to the volume of sales of marketable products;
• the ratio of profit to a fixed category of expenses.

It should be noted that an increase in the company's assets due to the receipt of any additional funds always provokes an increase in the operating leverage indicator.

How does the operating lever work?

The impact of operating leverage reflects entrepreneurial risk. In the case when this indicator is high, for each percentage decrease in the amount of revenue, there is a significant decrease in profit. it is also important to take into account the influence of the size of fixed costs. So, in the event that the operating leverage is high enough for large enterprises, they should be careful. With the slightest fluctuation in the economy, the solvency of customers will drop sharply, while the level of fixed costs will remain at the same level or even increase.

The impact of operating leverage needs to be assessed at all stages of a product's life cycle. This will allow timely response to changes in the economy. Thus, management will be able to manipulate fixed and variable costs in order to bring operating leverage to the optimum level.

Calculation of the effect of operating leverage

The basis of this indicator is the ratio of fixed and variable costs in relation to the size of the financial result. It is worth noting that profits and revenues change differently due to the presence of mandatory payments for utilities, depreciation, and so on. We can say that the financial result will be the more dependent on the level of income, the higher the fixed costs.

In relation to all of the above, operating leverage is equal to the ratio of profit growth to revenue growth. The indicator calculated in this way helps to predict the financial result, depending on fluctuations in the amount of income and fixed costs.

Economic sustainability of the enterprise

Any effective manager must know the methods of calculating the operating leverage in order to be able to assess the economic sustainability of the enterprise and influence it in time. This technique allows you to assess the situation accurately and quickly without compiling detailed reports. It becomes possible to adjust the volume of sales and the level of costs in order to maximize profits. In this context, the following factors must be taken into account:

• despite the fact that fixed costs can shift the break-even point, their change does not have any effect on marginal profit;
• variable costs do not just change the break-even value, but can also have a significant impact on profit;
• if a change in various types of costs occurs at the same time, then the zero level will shift significantly on the break-even chart;
• pricing policy has a significant impact on marginal profit.

Key Assumptions

The following key assumptions are used in calculating operating leverage, as well as in carrying out the corresponding analysis of production:

• all costs of the enterprise can be clearly divided into fixed and variable (in some cases, managers resort to an approximate classification);
• the company is engaged in the production of one type of product (if the products are produced in assortment, then it should not change throughout the reporting period);
• both costs and revenues should directly depend on the volume of products produced;
• no inventory left at the end of the reporting period finished products(it must be implemented in full);
• all indicators, except for the scale of production, must remain constant, or their spread in their values ​​over time must be insignificant (this applies to the price level, labor productivity, assortment component, and so on);
• operational analysis is applicable only for a short-term period (no more than a year), during which fixed costs do not change significantly.

What does the indicator reflect?

The operating lever gives an idea of following points in the activities of the enterprise:

• the level of economic efficiency for a specific sales indicator (in this regard, it is possible to plan the sales volume, which allows achieving the desired marginal profit);
• determination of sales volumes that will ensure full coverage of all production costs (meaning the achievement of a break-even level);
• formation of financial strength reserves in accordance with the economic risk indicator;
• the impact of each individual indicator of the enterprise on the final level of profit.

A full-fledged operational analysis allows a deeper study of the features of the functioning of the enterprise. In addition, it makes it possible to quickly respond to changes in the internal and external environment in order to reduce the risk of economic losses.

Main conclusions

Don't underestimate the role financial leverage in performance analysis manufacturing enterprise. This indicator helps to establish a clear relationship between profit and income, as well as the main types of costs. This helps management to quickly respond to certain changes in the internal or external environment to avoid significant financial losses. Another important point in the calculation of operating leverage is its relationship with the level of economic risk. It will be the higher, the more significant the leverage. Typically, the maximum value is observed in cases where the sale of products is approximately equal to the break-even level.

The effect of operating leverage is based on the division of costs into fixed and variable, as well as on the comparison of revenue with these costs. The action of production leverage is manifested in the fact that any change in revenue leads to a change in profit, and profit always changes more than revenue.

The higher the share of fixed costs, the higher the production leverage and entrepreneurial risk. To reduce the level of operating leverage, it is necessary to seek to convert fixed costs into variables. For example, workers in manufacturing can be transferred to piecework payment labor. Also, to reduce depreciation costs, production equipment can be leased.

Methodology for calculating the operating leverage

The effect of operating leverage can be determined by the formula:

Let's consider the effect of production leverage on a practical example. Let's assume that in the current period the revenue amounted to 15 million rubles. , variable costs amounted to 12.3 million rubles, and fixed costs - 1.58 million rubles. Next year, the company wants to increase revenue by 9.1%. Determine how much profit will increase using the force of operating leverage.

Using the formula, calculate the gross margin and profit:

Gross margin \u003d Revenue - Variable costs \u003d 15 - 12.3 \u003d 2.7 million rubles.

Profit \u003d Gross Margin - Fixed Costs \u003d 2.7 - 1.58 \u003d 1.12 million rubles.

Then the effect of operating leverage will be:

Operating leverage = Gross margin / Profit = 2.7 / 1.12 = 2.41

The operating leverage effect measures the percentage increase or decrease in earnings for a one percent change in revenue. Therefore, if revenue increases by 9.1%, then profit will increase by 9.1% * 2.41 = 21.9%.

Let's check the result and calculate how much the profit will change traditional way(without using the operating lever).

When revenue increases, only variable costs change, while fixed costs remain unchanged. Let's present the data in an analytical table.

Thus, profit will increase by:

1365,7 * 100%/1120 – 1 = 21,9%