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By
Pijarinee Jarussirirat
ID MA0N0207
Book: Page 553

The potential use of fixed operating costs
to magnify the effects of changes in sale
on the firm’s earnings before interest and
taxes (EBIT)
Sale revenue – Variable operating costs – Fixed operating costs = EBIT
P= sale price per unit
Q=Sale quantity in units
FC=Fixed operating cost per period
VC=variable operating cost per unit
The up-front development costs are fixed
production costs are approximately zero
(Variable operation cost = 0)



Once a company sells
enough copies to
cover its fixed costs,
incremental dollars go
primarily to profit
Because the company
has no long-term debt
in it’s capital structure
It’s total leverage is
derived only from FC
EBIT
Sales
FC
Item
FY2002
FY2003
FY2004
$1165
$1295
$1666
$1966
$2575
285
380
608
766
678
(1)% change in sales
-5.3%
11.2%
28.6%
18.0%
31.0%
(2)% change in EBIT
-24.6%
33.3%
60.0%
26%
-11.5%
4.6
3.0
2.1
1.4
-0.4
Sales revenue
(millions)
EBIT (million)
DOL (2÷1)
FY2005
FY2006
The acquisition of Macromedia for
approximately 3.5 billion
Huge fixed cost so minus in equation is very huge money to make
Operating leverage decrease (minus)
 So
changes fixed cost is the cause of
the gradual decrease in operating
leverage for Adobe