This preview shows page 1. Sign up to view the full content.
Unformatted text preview: rom www.fool.com. FY 1999 FY 2000 FY 2001 $1,015 $1,266 $1,230 $260 $408 $378 (1) % change in sales 24.7 2.9 (2) % change in EBIT 56.9 7.4 2.3 2.6 Sales revenue (millions)
EBIT (millions) DOL [(2) (1)] mission basis. The effects of changes in fixed operating costs on operating leverage can best be illustrated by continuing our example.
EXAMPLE Assume that Cheryl’s Posters exchanges a portion of its variable operating costs
for fixed operating costs by eliminating sales commissions and increasing sales
salaries. This exchange results in a reduction in the variable operating cost per
unit from $5 to $4.50 and an increase in the fixed operating costs from $2,500 to
$3,000. Table 12.5 presents an analysis like that in Table 12.4, but using the new
costs. Although the EBIT of $2,500 at the 1,000-unit sales level is the same as
before the shift in operating cost structure, Table 12.5 shows that the firm has
increased its operating leverage by shifting to greater fixed operating costs.
With the s...
View Full Document