SAFETY MARGIN RATIO AND OPERATING LEVERAGE IN AMERICAN MANAGEMENT ACCOUNTING

I find the operating leverage (OL) numbers and the safety margin ratios (SMR) of a business firm are: (a) driven by the firm’s ratio of total fixed cost (TFC) to the total contribution margin (TCM), (b) the two quantitative expressions of operating risk that underlies the firm’s cost-volume-profit structure, and (c) inverse to each other. Of the 13 popular American management accounting textbooks reviewed, none notes the TFC’s ratio to TCM as the driver of OL or SMR; 10 titles set forth OL only in the “cost structure” subheading; and only 3 titles put these two terms together within the cost structure” or the risk analysis subheading in their CVP analysis chapter, but without specifying the quantitative relationships between SMR and OL.