Predicting Operating Income via a Generalized Operating-Leverage Model

Sherwood Lane Lambert, Kevin Krieger and Nathan Mauck
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Sherwood Lane Lambert: College of Business, University of West Florida, Pensacola, FL 32514, USA
Kevin Krieger: College of Business, University of West Florida, Pensacola, FL 32514, USA

IJFS, 2024, vol. 12, issue 1, 1-19

Abstract: We propose a generalized, practitioner-oriented operating-leverage model for predicting operating income using net sales, cost of sales, depreciation, and SG&A. Prior research links operating income directly to these items; hence, our model includes all aggregate revenues and expenses that comprise operating income. Prior research finds that the cost of sales is “much less” sticky than depreciation and SG&A; hence, we use the cost of sales as a proxy for the total variable costs and depreciation and SG&A as proxies for the sticky fixed costs. We introduce a new adjustment to the textbook operating-leverage model so that the ratio of sales to the cost of sales remains constant for the reference and forecast periods. Inspired by prior research, we adjust depreciation and SG&A for cost stickiness. We find that using our generalized operating-leverage model improves the forecast accuracy of next-quarter and next-year operating income predictions compared to predictions made using textbook operating leverage, which is a special case of our model.

Keywords: contribution margin; cost volume profit; fixed costs; operating income; operating leverage; sticky costs; variable costs (search for similar items in EconPapers)
JEL-codes: F2 F3 F41 F42 G1 G2 G3 (search for similar items in EconPapers)
Date: 2024
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