The combined effect of increasing all three variables

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Unformatted text preview: ers the breakeven point. The combined effect of increasing all three variables (action 4) also results in an increased operating breakeven point. We now turn our attention to the three types of leverage. It is important to recognize that the demonstrations of leverage that follow are conceptual in nature and that the measures presented are not routinely used by financial managers for decision-making purposes. operating leverage The potential use of fixed operating costs to magnify the effects of changes in sales on the firm’s earnings before interest and taxes. Operating Leverage Operating leverage results from the existence of fixed operating costs in the firm’s income stream. Using the structure presented in Table 12.2, we can define operating leverage as the potential use of fixed operating costs to magnify the effects of changes in sales on the firm’s earnings before interest and taxes. FIGURE 12.2 Operating Leverage Breakeven analysis and operating leverage Sales Revenue 16,000 Costs/Revenues ($) 14,000 12,000 Total Operating Cost EBIT2 ($5,000) IT EB 10,000 8,000 6,000 EBIT1 ($2,500) Loss 4,000 Fixed Operating Cost 2,000 0 500 1,000 1,500 Q1 Q2 2,000 Sales (units) 2,500 3,000 CHAPTER 12 TABL...
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This document was uploaded on 01/19/2014.

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