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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