Operating leverage

Operating leverage - costs will experience MORE variable...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
* Day 10: Part 1 Agenda * Blackboard Grades—All Makeup  work must be completed by August 4  (last day of term) * Book Assignments Due Today by 5:00  PM * Chapter 10: Leverage * Resume Tips * * POW #9 Practice Problem: Emerson  Company  * Break * Business (aka Operating) Risk:       Variability or uncertainty associated  with operating income (i.e. EBIT).  Note:  Specific industry  influences business  risk.
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
* Financial Risk:       Risk of distress or  bankruptcy due to the use of fixed cost  financing.  Note:  Management  influences the financial  risk with VC vs. FC decisions. * Sales Volume Variability * Competition * Cost Variability * Product Diversification * Product Demand * Operating Leverage The use of  fixed  operating costs as  opposed to  variable  operating costs. A firm with relatively  HIGH  fixed operating 
Background image of page 2
Background image of page 3
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: costs will experience MORE variable operating income if sales change. Fixed Costs = Operating Leverage = Business Risk Question: Why do HIGH fixed costs create more variability? With high operating leverage , a small increase in sales produces a relatively larger increase in operating income . Stop to Note: This is the top area of the income statement from sales to EBIT. Operating Leverage : by using fixed operating costs, a small change in sales revenue is magnified into a larger change in operating income . This “multiplier effect” is called the degree of operating leverage (DOL). Example #1: DOL = 2 A 1% increase in sales will result in a 2% increase in operating income (EBIT) ....
View Full Document

This note was uploaded on 11/21/2011 for the course BUS M 301 taught by Professor Jimbrau during the Summer '11 term at BYU.

Page1 / 3

Operating leverage - costs will experience MORE variable...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online