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Unformatted text preview: LE Substituting Q 1,000, P $10, VC
yields the following result:
DOL at 1,000 units Q Q (P VC)
(P VC) FC $5, and FC (12.5) $2,500 into Equation 12.5 1,000 ($10 $5)
1,000 ($10 $5) $2,500 $5,000
$2,500 2.0 The use of the formula results in the same value for DOL (2.0) as that found by
using Table 12.4 and Equation 12.4.7 Fixed Costs and Operating Leverage
Changes in fixed operating costs affect operating leverage significantly. Firms
sometimes can incur fixed operating costs rather than variable operating costs
and at other times may be able to substitute one type of cost for the other. For
example, a firm could make fixed-dollar lease payments rather than payments
equal to a specified percentage of sales. Or it could compensate sales representatives with a fixed salary and bonus rather than on a pure percent-of-sales com- 5. Because the concept of leverage is linear, positive and negative changes of equal magnitude will always result in
equal degrees of leverage when the same base sales level is used as a point of reference. This relationship holds for all
types of lever...
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