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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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This document was uploaded on 03/30/2014.
- Spring '14