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Unformatted text preview: re consistent with the firm’s goal of maximizing its stock price
should be implemented. REVIEW OF LEARNING GOALS
Discuss the role of breakeven analysis, the operating breakeven point, and the effect of changing costs on it. Breakeven analysis measures the
level of sales necessary to cover total operating
costs. The operating breakeven point may be calculated algebraically, by dividing fixed operating costs
by the difference between the sale price per unit and
variable operating cost per unit, or it may be determined graphically. The operating breakeven point
increases with increased fixed and variable operating costs and decreases with an increase in sale
price, and vice versa.
LG1 Understand operating, financial, and total
leverage and the relationships among them.
Operating leverage is the use of fixed operating
costs by the firm to magnify the effects of changes
in sales on EBIT. The higher the fixed operating
costs, the greater the operating leverage. Financial
leverage is the use of fixed financial costs by the
firm to magnify the effects of changes in EBIT on
EPS. The hi...
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