Leverages

 important factor affecting business risk.

 What is Leverage?

• Operating leverage measures a company’s fixed costs as a percentage of its total costs.
• It is used to evaluate the breakeven point of a business, as well as the likely profit levels on individual
sales.
• The Formula for Operating Leverage Is:
Degree of operating leverage = Q*CM/Q*CM - Fixed operating costs
​where:
Q=unit quantity
CM=contribution margin (price - variable cost per unit)​
 Characteristics

Very high near the breakeven point and decreases as the level of production increases above
the breakeven point.

Measures the percentage increase in profits resulting from a given percentage increase in sales.

A measurement of the degree to which a firm or project relies on fixed rather than variable
costs.

DOL(Degree of Operating Leverage), is the ratio of net income variation to

sales variation
 Importance
The operating leverage formula is used to calculate a
company’s break-even point

Help set appropriate selling prices to cover all costs and generate
a profit.

Reveal how well a company is using its fixed-cost items, such as

machinery and equipment etc. to generate profits.

More profit a company can squeeze out of the same amount of

fixed assets, the higher its operating leverage.
 Types

High Low

A company with high fixed costs a company with low fixed costs

and low variable costs has high and high variable costs has low operating
operating leverage. leverage.
 Companies who declared bankruptcy
ALDO
Filing date:May 7
Outcome:Running out of cash, the
Canadian-owned company filed with
the hope of restructuring its debt and
closing stores to become more
competitive
Gold’s Gym
Filing Date: On May 4, 2020
Outcome: Gold's Gym said the
bankruptcy filing would only affect
company-owned locations, which
are about 10% of the nearly 700
worldwide, with a reemergence
target of August 2020.
 Companies who bounced back
Hostess Betsey Johnson

• Hostess declared bankruptcy in • Betsey Johnson had planned a

2012, and it seemed like the end of
Twinkies, Ho Hos, and Ring Dings.
• But the beloved brand is back after
it was acquired by a private equity
firm
massive expansion during the 2008
financial crisis.
• Betsey Johnson filed for bankruptcy
and closed all 63 stores in 2012.
• Steve Madden acquired the Betsey
Johnson brand in 2010,
 Video Link

• https://drive.google.com/file/d/1c2xeX-
CBtKYPyioDCllgnOXUosPmhmk4/view?usp=sharing
Presented By:
Anchal Tanwar
20BSP0243