Operating Leverage Analysis - A Conceptual Framework

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