Operating Leverage Analysis - A Conceptual Framework

Abstract

A conceptual framework for intra-firm operating leverage analysis { based on the mechanical analysis of physical leverage (the genesis of the concept of operating leverage) } of a manufacturing firm under condition of future business risk considering a short-term planning horizon , composed of (a) an ex-ante analysis conducted at the beginning of the period for choosing an ' Operating Account Structural Plan ' (OASP) from alternative OASPs based on the principle of maximization of expected utility { or principle of minimization of absolute value of expected disutility (negative utility)} of the ' elasticity coefficient measure' of the ' Degree of Operating Leverage ' (DOL) considering the degrees of ' Downside Operating Leverage Risk (DOLR) Averseness' and ' Upside Operating Leverage Risk (UOLR) Affinity' subjectively assigned by the decision-maker , and (b) an ex-post analysis conducted at the end of the period for the performance appraisal of the decision-maker based on ' operating leverage efficiency ' , is formulated and illustrated in this working paper .