The operating breakeven point may be calculated

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Unformatted text preview: calculated algebraically, by dividing fixed operating costs by the difference between the sale price per unit and variable operating cost per unit, or it may be determined graphically. The operating breakeven point increases with increased fixed and variable operating costs and decreases with an increase in sale price, and vice versa. costs by the firm to magnify the effects of changes in sales on EBIT. The higher the fixed operating costs, the greater the operating leverage. Financial leverage is the use of fixed financial costs by the firm to magnify the effects of changes in EBIT on EPS. The higher the fixed financial costs—typically, interest on debt and preferred stock dividends—the greater the financial leverage. The total leverage of the firm is the use of fixed costs—both operating and financial—to magnify the effects of changes in sales on EPS. Total leverage reflects the combined effect of operating and financial leverage. Understand operating, financial, and total leverage and the relationships among them. Operating leverage is the...
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