CAPITAL STRUCTURE
Leverage results from the use of fixed-cost assets
or funds to magnify returns to the firms owners.
EBIT = (P x Q) - FC - (VC x Q)
Breakeven Analysis: Algebraic Approach (Cont.)
Example 1:
ABC company has fixed operating costs of $2,500,
a sales price of $10 per unit, and variable costs of
$5 per unit.
Required: Find the OBP.
Example 2:
Assume that Cheryls Posters wishes to evaluate
the impact of several options: (1) increasing fixed
operating costs to $3,000, (2) increasing the sale
price per unit to $12.50, (3) increasing the variable
operating cost per unit to $7.50, and (4)
simultaneously implementing all three of these
changes.
Breakeven Analysis: Graphical Approach
Example 1:
Breakeven Analysis: Graphical Approach
Example 2:
Breakeven Analysis: Changing Costs and the
Operating Breakeven Point
Operating Leverage
The use of fixed operating costs to magnify the
effects of changes in sales on the firms earnings
before interest and taxes.
Example 3:
Cheryls Posters has fixed operating costs of $2,500,
a sales price of $10 per poster, and variable costs of
$5 per poster.
Required: Find The EBIT for 500, 1000 and 1500
Sales Levels
Example 3:
The EBIT for Various Sales Levels
Measuring the Degree of Operating Leverage
The numerical measure of the firms operating
leverage. There are two equations used to calculate
degree of operating leverage (DOL).
DOL = Percentage change in EBIT
Percentage change in Sales
OR
OR