The Operating Leverage And DOL
operating leverage is the relationship between a company's fixed and variable cost. the airline industry tends to have high operating leverage. the fixed costs for hifly airlines include hangar ?, leases for its aircraft, salaries of its clue paid annually and deviation insurance. its variable costs are refreshments for passengers and jet fuel. hifly's fixed costs are higher than its variable costs. therefore, the company has a high operating leverage. a company with a high operating leverage like hifly will see its profits go up when its ticket sales increase because fixed cost remains the same. likewise, a company with low operating leverage in a declining sales period must still pay its fixed costs and it will thus suffer bigger losses. the degree of operating leverage, dol, of a firm measures how well a company generates profit using its fixed costs. it is calculated as sales minus variable costs divided by profit. if hifly earns ticket sales of $3,000 and has variable costs of $300 and fixed costs of $1,000, then its profit is $3,000 minus $300 minus $1,000 equals $1,700. its dol is $3,000 minus $300 divided by $1,700 equals 1.6. hifly's competitor lodrive also earns bus seat sales of $3,000. its variable and fixed costs are $900 and $400 respectively. for a profit of $3,000 minus $900 minus $400 equals $1,700. lowdrive's dol is $3,000 minus $900 divided by $1,700 equals 1.2. hifly's operating leverage is higher than lodrive's, given their dol. if both companies experience a 10% sales increase, hifly's profits will rise by 16%, while lodrive's profits increase by 12%. a 10% sales decrease for air and bus tickets will bring about a profit loss of 16% and 12% for hifly and lodrive respectively. this example shows how operating leverage magnifies both profits and losses.
- operating leverage・・・営業レバレッジ
- deviation insurance・・・航路変更保険
- degree of operating leverage（dol）・・・営業面の増益効果度
- bring about・・・～をもたらす