4 operating costs 450unit sales in units bvariable

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Unformatted text preview: sts 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 11.5 presents an analysis like that in Table 11.4, 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 11.5 shows that the firm has increased its operating leverage by shifting to greater fixed operating costs. With the substitution of the appropriate values into Equation 11.5, the degree of operating leverage at the 1,000-unit base level of sales becomes DOL at 1,000 units 1,000 ($10 $4.50) 1,000 ($10 $4.50) $3,000 $5,500 $2,500 2.2 Comparing this value to the DOL of 2.0 before the shift to more fixed...
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This document was uploaded on 03/30/2014.

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