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Unformatted text preview: Illustrator
software applications, and
Adobe’s Acrobat software has
become a standard for sharing
Despite a sales slowdown in
2001, the company continued to
meet its earnings targets. Its ability to manage discretionary
expenses helped to keep its bottom line strong. As a software
company, it has an additional
advantage: operating leverage, the
use of fixed operating costs to
magnify the effect of changes in
sales on earnings before interest
and taxes (EBIT).
Adobe and its peers in the
software industry incur the bulk of
their costs early in a product’s life
cycle, in the research and development and initial marketing
stages. The up-front development
costs are fixed, regardless of how 515 Leverage and Capital Structure many copies of a program the
company sells, and subsequent
production costs are practically
zero. The economies of scale are
huge; once a company sells
enough copies to cover its fixed
costs, incremental revenue dollars
go primarily to profit.
The following table demonstrates the impa...
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