Predicting Operating Income via a Generalized Operating-Leverage Model

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 compr...

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Bibliographic Details
Published in:International journal of financial studies 2024-01, Vol.12 (1), p.11
Main Authors: Lambert, Sherwood Lane, Krieger, Kevin, Mauck, Nathan
Format: Article
Language:English
Subjects:
Accounting
Administrative expenses
contribution margin
cost volume profit
Costs
Financial statements
fixed costs
GAAP
Income taxes
operating income
Operating leverage
Profitability
Profits
Sales
sticky costs
Textbooks
Working capital
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Summary: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 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.
ISSN:2227-7072
2227-7072
DOI:10.3390/ijfs12010011