Sales at East Corporation declined from $100,000 to $80,000, while net operating income declined by 300%. Given these data, the company must have had an operating leverage of:

Operating leverage   = 300 / 20 = 15.

Explanation:

A cost-accounting formula that measures the degree to which a firm or project can boost operating income by increasing revenue is referred to as Operating leverage.

A business that makes sales with a high gross margin and low variable costs has high operating leverage.

It is measured as a percent change in operating income /percentage change in sales.

Here sales have declined by 20% and operating income has declined by 300%.

Operating leverage  = percentage change in operating income /percentage change in sales.

Operating leverage   = 300 / 20 = 15.

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