ACCT 101 paper 2

ACCT 101 paper 2 - greater affect on operating income. This...

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Brian McGuinn ACCT 101 Operating Leverage Vs. MOS. Operating leverage and margin of safety (MOS) are both indicators companies use to determine their level of risk. Margin of safety shows how much the sales can drop before the company begins to incur a loss. This can be computed by subtracting the breakeven sales from the expected sales. For these you can use dollars or units depending on how you want to see the data. With this you could also find the MOS as a percentage of sales by taking the MOS and dividing it by the expected sales. This tells you by what percentage the sales can go down before breaking even or incurring a loss. Operating leverage determines risk for a company by looking at the level of fixed and variable costs. A company with a high operating leverage has higher levels of fixed costs and lower levels of variable costs. For this type of company changes in sales have a
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Unformatted text preview: greater affect on operating income. This means they have a higher risk but also have a greater potential for reward if they increase sales. On the other hand, a company that has a lower operating leverage has lower levels of fixed costs and higher levels of variable costs. This type of company has little affect on operating income when sales change. Therefore they have a lower level of risk but do have a lower potential benefit for increasing sales. The operating leverage factor is determined by taking sales revenue, subtracting variable costs to get the contribution margin, and dividing the result by the operating income. This tells companies by what percentage operating income will change from a 1% change in sales volume. References: Bamber, L., K. Braun, and W. Harrison. 2007. Managerial Accounting . Upper Saddle River, NJ: Prentice Hall...
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