# How to find fixed cost

from book 4 level 1, we can count fixed cost if we know the number of products sold. the examples of counting the fixed cost assumes one kinds of product sold. but in fact, a company sell many kinds of products and we can not know exactly how many each product is sold.

I want to know operating leverage of a company from its financial report. this company sell many kind of product

I dont need to know exact operating leverage but i want to estimate it. pls, help, how can I estimate?

I am not aware of the chapter or book you are referring but let me try to explain the method for calculating operating leverage for a company.

First of all, your question has two parts:

1. Calculating operating leverage from its financial statement
2. Estimating operating leverage

Let’s take it one by one:

1. Calculating operating leverage:

As per the formula, Operating Leverage = Fixed cost / (Fixed cost + Variable cost)

The formula might look simple but calculating it could be challenging because of:

1. Limitation of information disclosure in the financial statement: we would require clear segregation between fixed and variable cost which is difficult to determine from the information presented in the audited financial report of a company
2. Most of the costs are neither fixed nor variable. Let’s take an example of staff cost. Staff cost can be a combination of fixed cost (e.g., salary of admin staff, back-office employees, etc.) and variable cost (e.g, salary of sales staffs, top management, etc.)

Due to this, we cannot arrive at a correct value of operating leverage based on audited financials (it is a general statement. This might not be true for all companies)

1. Estimating operating leverage can be determined in two steps:
2. a) Find out which is fixed cost and variable cost
3. b) how these costs are going to change in the future. The variable cost could be estimated as a % of revenue and fixed cost can be increased by a certain rate (some people use the inflation rate as a proxy of growth in the fixed cost)

And you are done here. You have fixed cost and variable cost. Now you can estimate operating leverage

your answer is great. but the point is how to get approximate number of Operating leverage, OL.
we need to know management accounting to know which is variable costs. variable costs are
-material to become products
-direct labor
-deprecation/amortization.
how to estimate those above things?
CFA program give the concept of the fixed cost but dont explain how to guess this number. CFA program is weak. CFA is wordy not concise and not comprehensive. CFA focus too much on quantitative analysis which can not be applied in real business world.