ACCT 110 Lecture Notes - Lecture 9: Operating Leverage, Gross Profit, Fixed Cost
23 May 2018
School
Department
Course
Professor
Accounting 110
The following information is from the video lecture and powerpoint for Accounting 110. The
yellow
highlights are what I think are
important. The highlights of different colors are to make it easier to find definitions that came out previously.
Accounting 110 Week 8 Cost Behavior, Operating Leverage,
and Profitability Analysis
- Fixed Cost Behavior
- When activity increases/decreases
-
- How much will it cost one person to a sales meeting? Two?
- It depends on the fixed cost behavior
- If more people buy a product, could we charge less for the product?
- E.G A band will be paid $48,000 regardless of tickets sold
-
- Price per ticket comes from Totals Cost of Band / Tickets
Sold
Demonstrate the effects of operating leverage on profitability
- Operating Leverage
- It’s a measure of the extent to which fixed costs are being used in an
organization
- Greatest in companies that have a high proportion of fixed costs in relation
to variable costs
- (Concert example) All costs are fixed
-
- Tickets sales increasing is 10% revenue increase
- The gross profit increase is 90% gross profit increase
- When all costs are fixed (which is high operating leverage) every
additional sales dollar contributes one dollar to gross profit
- Risk and Reward Assessment
- (Concert Example)
-
- Ticket sales increasing is 10% revenue increase
- Gross profit increasing is also 10% gross profit increase
- Shifting the cost structure from fixed to variable (decreasing risk)
reduces risk, but it reduces the potential for profit
- Variable Cost Behavior
- (Concert Example) What if band receives $16 per ticket sold instead of a
fixed $$48,000
-
- Total variable cost increases in direct proportion to the number of
tickets sold
- Variable unit cost per ticket remains at $16 regardless of the
number of tickets sold
- Total variable cost increases in direct proportion to the number of units
sold
- The behavior of variable cost per unit is contradictory to the word
variable
- Variable cost per unit remains constant regardless of how
many units are sold
- When activity increases/decreases
-
- (Concert Example) Band receives $16 for each ticket sold
- More tickets sold will increase band’s take from the concert
- They can only receive a constant $16 from each individual ticket
sold
Document Summary
The following information is from the video lecture and powerpoint for accounting 110. The yellow highlights are what i think are important. The highlights of different colors are to make it easier to find definitions that came out previously. Accounting 110 week 8 cost behavior, operating leverage, and profitability analysis. E. g a band will be paid ,000 regardless of tickets sold. Price per ticket comes from totals cost of band / tickets. Demonstrate the effects of operating leverage on profitability. It"s a measure of the extent to which fixed costs are being used in an organization. Greatest in companies that have a high proportion of fixed costs in relation to variable costs (concert example) all costs are fixed. Tickets sales increasing is 10% revenue increase. The gross profit increase is 90% gross profit increase. When all costs are fixed (which is high operating leverage) every additional sales dollar contributes one dollar to gross profit.
