How to Calculate Operating Leverage_Finance and Business_Common Sense of Life

Part 1 Part 1 of 2: Calculating Operating Leverage

1 Calculate contribution margin. The contribution margin is total sales less variable expenses. Variable expenses are those costs that increase with each incremental sale. Cost of goods sold, sales commissions and delivery expenses are examples of variable expenses. Subtract these expenses from total sales to calculate the contribution margin.
- For example, suppose Company ABC had $100,000 in total sales in December, 2015. Variable expenses were: cost of goods sold - $30,000; sales commissions – 20,000; delivery expenses - $10,000.
- The contribution margin is $</annotation></semantics></math>.</li> </ul> </li> <li> 2 <b>Calculate operating income.</b> Operating income is the total sales less all operating expenses except interest and taxes. If you have already deducted your variable expenses from total sales, now subtract fixed expenses to calculate the operating income. Fixed expenses include advertising, insurance, rent, utilities and payroll wages. <ul> <li>Suppose Company ABC’s fixed expenses were: advertising - $2,000; insurance - $5,000; rent - $3,000; utilities - $2,000; wages - $18,000.</li> <li>Total fixed expenses are $30,000.</li> <li>Operating income is total sales less variable and fixed expenses.</li> <li>For Company ABC, the total sales were $100,000. The variable expenses are $60,000 and fixed costs are $30,000.</li> <li>Operating income = <math xmlns=$

How to Calculate Operating Leverage