Chapter11

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: the operating breakeven graph originally shown in Figure 11.1. The additional notations on the graph indicate that as the firm’s sales increase from 1,000 to 1,500 units (Q1 to Q2), its EBIT increases from $2,500 to $5,000 (EBIT1 to EBIT2). In other words, a 50% increase in sales (1,000 to 1,500 units) results in a 100% increase in EBIT ($2,500 to $5,000). Table 11.4 includes the data for TABLE 11.4 The EBIT for Various Sales Levels Case 2 Case 1 50% 50% Sales (in units) 500 1,000 1,500 Sales revenuea $5,000 $10,000 $15,000 2,500 5,000 7,500 Less: Variable operating costsb Less: Fixed operating costs Earnings before interest and taxes (EBIT) 2,500 $ 2,500 2,500 0 $ 2,500 $ 5,000 100% aSales revenue $10/unit bVariable operating costs sales in units. $5/unit sales in units. 100% CHAPTER 11 FIGURE 11.2 Operating Leverage Breakeven analysis and operating leverage 14,000 Costs/Revenues ($) 427 Sales Revenue 16,000 12,000 Leverage and Capital Structure 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 2,500 3,000 Sales (units) Figure 11.2 as well as relevant data for a 500-unit sales level. We can i...
View Full Document

This document was uploaded on 03/30/2014.

Ask a homework question - tutors are online