Kinh Nghiệm về Which of the following best describes how sof contributions provide operational leverage? Mới Nhất
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What Is Operating Leverage?
Operating leverage is a cost-accounting formula that measures the degree to
which a firm or project can increase operating income by increasing revenue. A business that generates sales with a high gross margin and low variable costs has high operating leverage.
Nội dung chính Show
- What Is Operating Leverage?
- Key Takeaways
- Understanding Operating Leverage
- The Operating Leverage Formula Is:
- High and Low Operating Leverage
- What Does Operating Leverage Tell You?
- What Is the Degree of Operating Leverage (DOL)?
- What Are Examples of High and Low Operating Leverage?
- Is responsible for conducting military operations to assist in the implementation of emergency action plans?
- What ensures DOD processes procedures and resources are in place to tư vấn the president and secretary of defense in a national security emergency?
- Is are DOD’s unified effort to tư vấn and augment?
- Which of the following is described as the ability to project the military instrument?
Key Takeaways
- Operating leverage is used to calculate a company’s break-even point and help set appropriate selling prices to cover all costs and generate a profit.
- Companies with high operating leverage must cover a larger amount of fixed costs each month regardless of whether they sell any units of product.
- Low-operating-leverage companies may have high costs that vary directly with
their sales but have lower fixed costs to cover each month.
The Operating Leverage And DOL
Understanding Operating Leverage
The higher the
degree of operating leverage, the greater the potential danger from forecasting risk, in which a relatively small error in forecasting sales can be magnified into large errors in cash flow projections.
The Operating Leverage Formula Is:
Degree of operating leverage = Contribution margin Profit textDegree of operating leverage = fractextContribution margintextProfit Degree of operating leverage=ProfitContribution margin
This can be restated as:
Degree of operating leverage
= Q. ∗ C M Q. ∗ C M − Fixed operating costs where: Q. = unit quantity
C M = contribution margin (price – variable cost per unit) beginaligned &textDegree of operating leverage = fracQ.*CMQ.*CM – textFixed operating costs\ &textbfwhere:\ &Q. = textunit quantity\
&CM = textcontribution margin (price – variable cost per unit)\ endaligned Degree of operating leverage=Q.∗CM−Fixed operating costsQ∗CMwhere:Q.=unit quantityCM=contribution margin (price – variable cost per unit)
The operating leverage formula is used to calculate a company’s break-even point and help set appropriate selling prices to cover all costs and generate a profit. The formula can reveal how well a company is using its fixed-cost items, such as its warehouse and machinery and equipment, to generate profits. The more profit a company can squeeze out of the same amount of fixed assets, the higher its operating leverage.
One
conclusion companies can learn from examining operating leverage is that firms that minimize fixed costs can increase their profits without making any changes to the selling price, contribution margin, or the number of units they sell.
Example
For example, Company A sells 500,000 products for a unit price of $6 each. The company’s fixed costs are $800,000. It costs $0.05 in variable costs per unit to make
each product.
Calculate company A’s degree of operating leverage as follows:
500
, 000 ∗ ( $ 6.00 − $ 0.05 ) 500 , 000 ∗ ( $ 6.00 − $ 0.05 ) − $ 800 , 000
=
$ 2 , 975 , 000 $ 2 , 175 , 000 = 1.37 or 137 % . beginaligned
&frac500,000*left($6.00
– $0.05 right )500,000*left($6.00 – $0.05 right )-$800,000\ &=frac$2,975,000$2,175,000\ &=1.37 text or 137%. endaligned 500,000∗($6.00−$0.05)−$800,000500,000∗($6.00−$0.05)=$2,175,000$2,975,000=1.37 or 137%.
A 10% revenue increase should result in a 13.7% increase in operating income (10% x 1.37 = 13.7%).
High and Low Operating Leverage
It is important to compare operating leverage between companies in the same industry, as some industries have higher fixed costs than others. The concept of a high or low ratio is then more clearly defined.
Most of a
company’s costs are fixed costs that recur each month, such as rent, regardless of sales volume. As long as a business earns a substantial profit on each sale and sustains adequate sales volume, fixed costs are covered and profits are earned.
Other company costs are variable costs that are only incurred when sales occur. This includes labor to assemble products and the cost of raw materials used to make products. Some companies earn less profit on each sale but
can have a lower sales volume and still generate enough to cover fixed costs.
For example, a software business has greater fixed costs in developers’ salaries and lower variable costs in software sales. As such, the business has high operating leverage. In contrast, a computer consulting firm charges its clients hourly and doesn’t need expensive office space because its consultants work in clients’ offices. This results in variable consultant wages and low fixed
operating costs. The business thus has low operating leverage.
Most of Microsoft’s costs are fixed, such as expenses for upfront development and marketing. With each dollar in sales earned beyond the break-even point, the company makes a profit, but Microsoft has
high operating leverage.
Conversely, Walmart retail stores have low fixed costs and large variable costs, especially for merchandise. Because Walmart sells a huge volume of items and pays upfront for each unit it sells, its cost of goods sold increases as sales increase. Because of this, Walmart stores have low operating leverage.
What Does Operating Leverage Tell You?
The operating leverage formula is used to
calculate a company’s break-even point and help set appropriate selling prices to cover all costs and generate a profit. This can reveal how well a company is using its fixed-cost items, such as its warehouse and machinery and equipment, to generate profits. The more profit a company can squeeze out of the same amount of fixed assets, the higher its operating leverage.
One conclusion companies can learn from examining operating leverage is that firms that minimize fixed costs can increase
their profits without making any changes to the selling price, contribution margin, or the number of units they sell.
What Is the Degree of Operating Leverage (DOL)?
The degree of operating leverage (DOL) is a multiple that measures how much the operating income of a company will change in response to a change in sales. Companies with a large proportion of fixed costs (or costs that don’t change with production) to variable costs (costs
that change with production volume) have higher levels of operating leverage. The DOL ratio assists analysts in determining the impact of any change in sales on company earnings or profit.
What Are Examples of High and Low Operating Leverage?
Companies with high fixed costs tend to have high operating leverage, such as those with a great giảm giá of research & development and marketing. With each dollar in sales earned beyond the break-even
point, the company makes a profit. Conversely, retail stores tend to have low fixed costs and large variable costs, especially for merchandise. Because retailers sell a large volume of items and pay upfront for each unit sold, COGS increases as sales increase. Because of this, such stores often have low operating leverage.
Is responsible for conducting military operations to assist in the implementation of emergency action plans?
THE CONDUCT OF MILITARY OPERATIONS TO ASSIST IN THE IMPLEMENTATION OF EMERGENCY ACTION PLANS IS THE RESPONSIBILITY OF THE GEOGRAPHIC COMBATANT COMMANDER, AS DIRECTED BY SECRETARY OF DEFENSE.
What ensures DOD processes procedures and resources are in place to tư vấn the president and secretary of defense in a national security emergency?
Emergency Preparedness (EP): Those planning activities undertaken to ensure DOD processes, procedures, and resources are in place to tư vấn the President and Secretary of Defense in a designated National Security Emergency (DPG 04).
Is are DOD’s unified effort to tư vấn and augment?
Security force assistance is DOD’s contribution to a unified action effort to tư vấn and augment the development of the capacity and capability of foreign security forces and their supporting institutions toward achievement of specific objectives shared by the U.S. Government.
Which of the following is described as the ability to project the military instrument?
It defines airpower, as the ability to project military power through control and exploitation in, from and through the air. Airpower is employed to achieve joint force commander (JFC) objectives in tư vấn of the National Defense Strategy (NDS).
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