How much operating profit changes for a given change in revenue, driven by the share of costs that are fixed.
Operating leverage describes how sensitive profit is to sales. A business with mostly fixed costs, such as software or manufacturing with large plants, sees profit rise sharply when revenue grows, because each extra dollar of revenue carries little extra cost. The same structure makes profit fall sharply when revenue drops.
Degree of operating leverage (DOL) = contribution margin / operating profit, where contribution margin is revenue minus variable costs. A DOL of 4 means a 1% change in revenue moves operating profit about 4%.
Revenue of $1,000,000, variable costs of $600,000 and fixed costs of $300,000 give a contribution margin of $400,000, operating profit of $100,000 and a DOL of 4. A 10% revenue increase lifts contribution margin to $440,000 and operating profit to $140,000, a 40% rise.
Treating it as constant: DOL changes with every revenue level, and costs that look fixed often step up at capacity. For its effect on margins, see operating margin.