measure of fixed costs in a company's operating structure. High operating leverage magnifies changes in earnings so that small changes in sales lead to earnings instability. Operating leverage can be measured through the following ratios: (1) fixed costs to total costs; (2) percentage change in operating income to the percentage change in sales volume; and (3) net income to fixed charges. An increase in (1) and (2) or a decrease in (3) shows higher
fixed charges, resulting in greater instability.