Degree of Operating Leverage

Cost-volume-profit analysis is also a useful tool for analyzing the financial characteristics of alternative production systems. This analysis focuses on how total costs and profits vary with operating leverage or the extent to which fixed production facilities versus variable production facilities are employed.

Q = Fixed Costs + Profit Requirement Profit Contribution = $100,000 + $20,000 $8

= 15,000 units

The relation between operating leverage and profits is shown in Figure 8.13, which contrasts the experience of three firms, A, B, and C, with differing degrees of leverage. The fixed costs of firm B are typical. Firm A uses relatively less capital equipment and has lower fixed costs, but it has a steeper rate of increase in variable costs. Firm A breaks even at a lower activity level than

Was this article helpful?

0 0
Your Retirement Planning Guide

Your Retirement Planning Guide

Don't Blame Us If You End Up Enjoying Your Retired Life Like None Of Your Other Retired Friends. Already Freaked-Out About Your Retirement? Not Having Any Idea As To How You Should Be Planning For It? Started To Doubt If Your Later Years Would Really Be As Golden As They Promised? Fret Not Right Guidance Is Just Around The Corner.

Get My Free Ebook

Post a comment