Fixed costs are a function of time not sales volume

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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 Table 11.2. P Q FC 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 Breakeven Analysis Item Sales revenue Operating leverage Less: Fixed operating costs Less: Variable operating costs Earnings before interest and taxes Algebraic representation (P Q) 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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