Operating leverage can be understood from two aspects.
On the one hand, it can be seen from the calculation formula of operating leverage coefficient that the marginal contribution will increase with the increase of unit price and sales volume. Operating leverage coefficient = marginal contribution/(marginal contribution-fixed cost), because the denominator has to subtract a fixed cost, and the denominator is always smaller than the numerator, so when a numerical value is added at the same time, the increase is relatively small compared with the numerator with a larger amount, but relatively large compared with the denominator with a smaller amount. Therefore, the greater the denominator increases, the smaller the whole formula, that is, the smaller the operating leverage coefficient. For example, marginal contribution = 100 and fixed cost =20, then when the unit price rises, the operating leverage coefficient =100/(100-20) =1.25. 1.25, that is, the operating leverage coefficient becomes smaller, and the two change in opposite directions, and other analyses are the same.
On the other hand, we can know that the greater the operating leverage coefficient, the greater the operating risk. If the unit price and sales volume increase, doesn't that mean more profits can be made? The smaller the operating risk, the smaller the operating leverage coefficient, so it changes in the opposite direction to the operating leverage coefficient.