6.Drop week 3 homework here
1) read chapter 5
2) complete the homework problems chapter 5 problems 1-3
3) Please reach out to me and set up a call on your interview and project
no discussion this weekChapter
McGraw-Hill/Irwin
Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
Operating and Financial Leverage
5
Chapter Outline
What is leverage?
Operating leverage.
Financial leverage.
Potential profits or increased risk?
What is Leverage?
Use of special forces and effects to magnify or produce more than the normal results from a given course of action.
Can produce beneficial results in favorable conditions.
Can produce highly negative results in unfavorable conditions.
Leverage in Business
Determining type of fixed operational costs.
Plant and equipment
Eliminates labor in production of inventory.
Expensive labor
Lessens opportunity for profit but reduces risk exposure.
Determining type of fixed financial costs.
Debt financing
Substantial profits but failure to meet contractual obligations can result in bankruptcy.
Selling equity
Reduces potential profits but minimize risk exposure.
Operating Leverage
The extent to which fixed assets and associated fixed costs are utilized in a business.
Operational costs include:
Fixed
Variable
Semivariable
Break-Even Chart: Leveraged Firm
Break-Even Analysis
The break-even point is at 50,000 units, where the total costs and total revenue lines intersect.
Units = 50,000 .
Total Variable Fixed Costs Total Costs Total Revenue Operating Income
Costs (TVC) (FC) (TC) (TR) (loss)
(50,000 X $0.80) (50,000 X $2)
$40,000 $60,000 $100,000 $100,000 0
Administrator (A) – replace equations with appropriate graphics
Break-Even Analysis (cont’d)
The break-even point can also be calculated by:
Fixed costs …
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