From the course: Excel: Management Accounting

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Using operating leverage

Using operating leverage - Microsoft Excel Tutorial

From the course: Excel: Management Accounting

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Using operating leverage

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- [Instructor] One of the most powerful tools in management accounting is operating leverage. Let's take a look at how this works. I'm in the 05_04_Begin Excel file. Now, what you see here is our budget model for the year 2025 for the Acme Dirt Company, and we have a series of costs for the firm, and some of these costs are fixed costs. Some of these costs are variable costs. What we might like to know, though, is if we're able to increase sales, how will that flow through to the bottom line? Well, that's the question that degree of operating leverage answers. Now, degree of operating leverage, or DOL, is simply sales minus variable costs divided by sales, minus fixed costs minus variable cost. And what degree of operating leverage is actually capturing is, it is the percentage change in earnings before interest in taxes divided by the percentage change in sales. So a higher DOL means you get a larger…

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