It can also be used to show the effect on the

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desired target profit. It can also be used to show the effect on the breakeven output and the output at which the firm earns a specific target profit resulting from a change in the product price, and in the firm's total fixed costs and total variable costs. When prices and average variable costs are not fixed, nonlinear cost–volume–profit charts and analysis must be used. Difficulties can arise when the product mix of the firm changes over time and it is difficult to allocate the fixed costs among the various products. ( b ) The operating leverage of the firm refers to the ratio of its total fixed costs to total variable costs. When a firm becomes more highly leveraged, its total fixed costs increase, its average variable costs decline, its breakeven output is larger, and its profitability becomes more variable. The sensitivity or responsiveness of the firm's profits to a given change in its output or sales is measured by the degree of operating leverage ( DOL ). This increases as the firm becomes more highly leveraged or capital intensive.
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A highly leveraged firm is likely to earn larger profits than a less highly leveraged firm at large levels of output, but it is also likely to incur larger losses at small levels of output. The larger profits of the more highly leveraged firm when output is high can thus be regarded as the return for its greater risk. b. Problems: 3. ( a ) Running the night flight leads to an extra revenue of $2,000 (from the 10 extra passengers) and an extra cost of $1,200 in overnight charges for the plane remaining in New York in comparison to a morning flight. Since the extra revenue exceeds the extra costs, it pays for the airline to maintain its night flight rather than replacing it with a morning flight. ( b ) The total cost of running the plane for a day is $25,000 ($11,000 in operating costs for the two flights per day plus the $3,000 of fixed costs). Also, the airline pays $1,200 per day to remain in New York overnight. Thus, total costs equal $26,200.
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