The combined effect of increasing all three variables

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Unformatted text preview: of increasing all three variables (action 4) also results in an increased operating breakeven point. We now turn our attention to the three types of leverage. It is important to recognize that the demonstrations of leverage that follow are conceptual in nature and that the measures presented are not routinely used by financial managers for decision-making purposes. operating leverage The potential use of fixed operating costs to magnify the effects of changes in sales on the firm’s earnings before interest and taxes. EXAMPLE Operating Leverage Operating leverage results from the existence of fixed operating costs in the firm’s income stream. Using the structure presented in Table 11.2, we can define operating leverage as the potential use of fixed operating costs to magnify the effects of changes in sales on the firm’s earnings before interest and taxes. Using the data for Cheryl’s Posters (sale price, P $10 per unit; variable operating cost, VC $5 per unit; fixed operating cost, FC $2,500), Figure 11.2 presents...
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