Unformatted text preview: Southwest Airlines and Jet Blue Airlines, have lower labor costs and operate out of lower cost and less-congested airports. Therefore, the operating leverage of American Airlines is higher than that of Jet Blue.
Operating leverage is high in ﬁrms with a high proportion of ﬁxed costs and a low
proportion of variable costs and results in a high contribution margin per unit. The higher
the ﬁrm’s ﬁxed costs, the higher the break-even point. Once the break-even point has been
reached, however, proﬁt increases at a high rate. Exhibit 3.5 demonstrates the primary differences between two companies, Lo-Lev Company (with relatively high variable costs)
and Hi-Lev Company (with relatively high ﬁxed costs). Orientation CHAPTERS IN PART ONE 1 Making Yourself Successful in College 2 Approaching College Reading and
Developing a College-Level Vocabulary 3 Approaching College Assignments:
Reading Textbooks and Following Directions Different industries have different cost structures. Electric utilities (left) have high ﬁxed costs and
high operating leverage. Grocery stores (right) have lower ﬁxed costs and low operating leverage. Exhibit 3.5 Lo-Lev Company
(1,000,000 units) Comparison of Cost
Sales . . . . . . . . . . . .
Variable costs . . . . . .
Contribution margin . .
Fixed costs . . . . . . . .
Operating proﬁt . . . . Percentage $1,000,000
20 Break-even point . . .
Contribution margin per unit $0.25 cor50782_ch01_001-072.indd 1 lan27114_ch03_080-109.indd 88 ✓ Related Resources
See pages 000 to 000
(1,000,000 units) of the Annotated Instructor’s
Edition for general suggesAmount
tions related to the chapters
100 Part One.
20 1 10/5/09 11:09:29 PM 10/23/09 4:49:33 AM REVISED PAGES Chapter 3 Fundamentals of Cost-Volume-Profit Analysis 89 Effect of Cost Structure on Operating
and Investing Decisions In Action Different cost structures lead to different decisions that
ﬁrms make concerning operations and investments.
Consider the following two statements:
1. 2. “Ahold now has about $23 billion in sales among
its six U.S. supermarket chains—large but uncomfortably behind giants such as Wal-Mart, Kroger,
and Albertson’s. The logic of consolidation is that,
in a business with such slim proﬁt margins, bigger
companies gain important competitive advantage
by being able to negotiate better terms and prices
from suppliers, better rents from landlords and better advertising deals from media outlets” (Washington Post, February 8, 2004).
“Many experts say the airlines throw planes on a
route to grab market share from rivals. Robert L. 1 Crandall, the former chief executive of American Airlines, said that airlines added planes because growth
spreads ﬁxed costs over more passenger miles. ‘If
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- Spring '07
- Contribution Margin, CVP analysis