Degree of Operating Leverage
= Percentage Change in Operating Income/Percentage Change in Sales
The break even point for a particular value of sales, as discussed in the earlier chapter, can be determined or different amounts of fixed cost by dividing the respective fixed cost of the percentage relationship of contribution to sales, or F/(C/S)
(F = Fixed cost, C/S = Percentage of contribution of sales)
Both these approaches are effectively one and the same. In the former approach Q P will give total sales and Q × V will give total variable cost, i.e., the numerator will be (Sales-variable cost), i.e., contribution Similarly the denominator will give contribution (fixed cost) i.e., operating profit.