BuyFindarrow_forward

Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977

Solutions

Chapter
Section
BuyFindarrow_forward

Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977
Textbook Problem

Changes in sales cause changes in profits. Would the profit change associated with sales changes be larger or smaller if a firm increased its operating leverage? Explain your answer.

Summary Introduction

To explain: Whether the change in profit associated with change in sales be larger or smaller if a firm increases its operating leverage.

Introduction:

Operating Leverage:

Operating leverage refers to the use of both fixed as well as variable costs to make sales. Change in sales level leads to change in earnings before interest and tax.

Answer

Yes, change in profit associated with change in sales will be larger if a firm increases its operating leverage.

Explanation
  • As change in sales leads to change in profits, it also increases the operating leverage.
  • Sales and profits have positive relationship, but a small change in sales leads to more change in the profit.
  • Higher fixed expenses leads to higher operating leverage.
  • Increase in operating leverage represents the higher profits as the degree of operating leverage can be determined with the formula,

Degreeofoperatingleverage=PercentagechangeinEBITPercentagechangeinsales

Where,

  • EBIT is earning before interest and tax.
Conclusion

So, the change in profit would be larger if a firm increases its operating leverage.

The Solution to Your Study Problems

Bartleby provides explanations to thousands of textbook problems written by our experts, many with advanced degrees!

Get Started

Additional Business Solutions

Find more solutions based on key concepts

Show solutions add

Explain how absolute advantage and comparative advantage differ.

Brief Principles of Macroeconomics (MindTap Course List)

What are the two main causes of market failure? Give an example of each.

Principles of Microeconomics (MindTap Course List)

RESIDUAL DIVIDEND MODEL Welch Company is considering three independent projects, each of which requires a 5 mil...

Fundamentals of Financial Management, Concise Edition (with Thomson ONE - Business School Edition, 1 term (6 months) Printed Access Card) (MindTap Course List)

Find all the answers to your study problems with bartleby.
Textbook solutions plus Q&A. Get As ASAP arrow_forward