Management and Organizational Studies 3370A/B Lecture Notes - Lecture 4: Operating Leverage, Contribution Margin, Fixed Cost

• School: Western University
• Department: Management and Organizational Studies
• Course: Management and Organizational Studies 3370A/B
• Professor: Bill Dawson

Document Summary

Powerful tool that helps managers understand the relationships among cost, volume and profit: breakeven load depends on the level of fixed costs and price per unit, higher the breakeven = higher the fixed costs. Focuses on how profits are affected by 5 elements: Prices of products: volume or level of activity, total fixed costs, mix of products sold. Prices to charge: what products to manufacture or service to offer, marketing strategy to adopt, cost structures to implement. Emphasizes behavior of costs: helpful for manager in judging the impacts on profits of changes in selling price, cost or volume, use operating income as measure of profit. Amount remaining from sale revenue after variable expenses have been deducted. It is amount to cover fixed expenses and then to provide profits for the period: used to first cover fixed expense and then remaining goes towards profits. If cm is not sufficient to cover fixed expenses= loss occurs for period.