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Unformatted text preview: Illustrator software applications, and Adobe’s Acrobat software has become a standard for sharing documents online. 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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This document was uploaded on 01/19/2014.

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