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Unformatted text preview: ixed and variable operating costs. Fixed
costs are a function of time, not sales volume, and are typically contractual; rent,
for example, is a fixed cost. Variable costs vary directly with sales and are a function of volume, not time; shipping costs, for example, are a variable cost.2 The Algebraic Approach
Using the following variables, we can recast the operating portion of the firm’s
income statement given in Table 11.1 into the algebraic representation shown in
VC sale price per unit
sales quantity in units
fixed operating cost per period
variable operating cost per unit Rewriting the algebraic calculations in Table 11.2 as a formula for earnings
before interest and taxes yields Equation 11.1:
EBIT TABLE 11.2 (P Q) FC (VC Q) (11.1) Operating Leverage, Costs, and
Sales revenue Operating leverage Less: Fixed operating costs
Less: Variable operating costs
Earnings before interest and taxes Algebraic
FC (VC Q)
EBIT 1. Quite often, the breakeven point is calculated so that it represents the point at which all operating and financia...
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This document was uploaded on 03/30/2014.
- Spring '14