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378 Corporate Finance BRILLIANT’S

age exists. The greater the DOL, the higher is h¡Ÿ& DOL {OVZr A{YH$ hmoJr, Am°naoqQ>J brdaoO ^r CVZm
the operating leverage. A{YH$ hmoJmŸ&

Percentage change in EBIT
DOL =  1
Percentage change in Sales

 EBIT EBIT
Alternatively, DOL =
 Q Q
If we apply this formula to above example, we get
 100%  100%
DOL = = 4 or, = 4
 25%  25%
Thus, we may notice the manner in which AV…$h_ XoI gH$Vo h¢ {H$ {dH«$` H$s _mÌm _| n[adV©Z
profits change in response to change in volume. go bm^ _| n[adV©Z {H$g àH$ma hmoVm h¡Ÿ& Am°naoqQ>J brdaoO
The higher the degree of operating leverage, the H$s {S>J«r {OVZr A{YH$ hmoJr, {dH«$` H$s _mÌm _| CVma-
greater will be the fluctuations in profits in re- M‹T>md CVZm A{YH$ hmoJmŸ& hmcm§{H$ Am°naoqQ>J crdaoO Ho$dc
sponse to changes in volume. However, oper-
ating leverage exists only when there are fixed V^r hmoJm O~ {\$ŠñS> Am°naoqQ>J H$m°ñQ²>g hmoŸ& `{X \$_© _|
H$moB© {\$ŠñS> H$m°ñQ> Zht h¡ Vmo Am°naoqQ>J brdaoO Zht
operating costs. If there are no fixed operating
costs, there will be no operating leverage. hmoJmŸ&
Significance of Operating Leverage Am°naoqQ>J brdaoO H$m _hÎd

Analysis of operating leverage of a firm is Am°naoqQ>J brdaoO H$s EZm{b{gg \$m`Z|{e`b _¡ZoOa
very useful to the financial manager. The sig- Ho$ {b`o ~hwV Cn`moJr hmoVr h¡& Am°naoqQ>J brdaoO Ho$
nificance of operating leverage may be dis- _hÎd H$mo {ZåZ{b{IV {~ÝXwAm| H$s ghm`Vm go g_Pm Om
cussed in the following points:
gH$Vm h¡:
1. Tells about impact of changes in sales: 1. {dH«$` _| n[adV©Z Ho$ à^md H$mo Xem©Vm h¡…
It tells the impact of changes in sales on operat-
Am°naoqQ>J brdaoO {dH«$` _| n[adV©Z H$m Am°naoqQ>J BÝH$_
ing income. A firm having higher DOL (Degree
of Operating Leverage) can experience a mag- na hmoZo dmbo à^md H$mo Xem©Vm h¡Ÿ& `{X Am°naoqQ>J brdaoO
nified effect on EBIT for even a small change in H$s {S>J«r Cƒ h¡ Vmo {dH«$` _| H$_ n[adV©Z ^r EBIT _|
sales level. If the sales level in- ~hþV ~‹S>m n[adV©Z bm gH$Vm h¡Ÿ& Eogr
creases, the operating profits may Significance of pñW{V _| {dH«$` ~‹T>Zo na Am°naoqQ>J
increase at a much faster rate but Operating Leverage àm°{\$Q> VoOr go ~‹T>oJm {H$ÝVw {dH«$` KQ>Zo
if there is a decline in sales level,
1. Tells about impact of na EBIT g_mßV hmo gH$Vm h¡ VWm hm{Z
EBIT may be wiped out and loss
changes in sales
may occur. hmo gH$Vr h¡Ÿ&
2. Measurement of Busi-
2. Measurement of Business ness risk 2. {~OZog H$s [añH$ H$s _mn… `{X
risk: If the degree of operating le- 3. Production Planning Am°noaqQ>J brdaoO A{YH$ h¡ Vmo {dH«$` _|
verage is higher, the EBIT would 4. Measurement of n[adV©Z go EBIT _| CVma-M‹T>md H$s J{V
be more sensitive for a given Break-Even Point
change in sales. If sales decrease, AË`ÝV Vrd« hmoJrŸ& `{X {dH«$` H$_ hmoVm