The concept of operating leverage can explain the three percent decline in sales that caused the twenty-one percent decline in profits. Operating leverage is a measurement of the degree to which a firm incurs a combination of fixed and variable costs. Basically, operating leverage is a cost accounting formula that displays how well a company is utilizing its fixed costs to generate a profit. Managers use fixed costs as a level to achieve disproportionate changes between revenue and profitability. Furthermore, a business can have either a high or low operating level, which is influenced by either the volume of sales and contribution of margin or the proportion of fixed costs and variable costs. Therefore, the more profit a firm can generate …show more content…
The margin of safety assesses the cushion between budgeted sales and break-even sales. Furthermore, a break-even point identifies when an investment will generate a positive return. Therefore, it is where sales revenues minus variable and fixed costs generate zero profits (Kampf, Majerčák, & Švagr, 2016). The margin of safety calculates the sum by which actual sales can fall short of expectancies before a company will start undergoing deficits. In order to determine the margin of safety, break-even sales are deducted from budgeted sales and the variance is then divided by budgeted sales. Therefore, without a major change in the company’s fixed cost structure, a decline in the company’s sales will cause their net earnings to be closer to their break-even point, which in turn will effectively lower their margin of safety. Furthermore, a decrease in sales on the margin of safety will be unfavorable. Moreover, the reduction in sales reduces the contribution, thereby reducing net income and the end result is a decline in the margin of safety. Therefore, due to lower sales, Home Depot’s margin of safety will be lower if a change in budgeted sales is not implemented (Edmonds et al.,
They raise the capital more easily and the interest rate would be much low. They employ expertise and specialist to manage its business and develop new products. The companies come response the market efficiently. And they design appropriate products for potential customers. It generates profits for the company.
Goods will be sold at that price at which:.. 1. More goods will be purchased and consumed. 2. More profits will be made. Thus goods will be sold at the most profitable price.
costing Marginal costing In product/service costing, a marginal costing system focuses on the behavioural, rather than the functional, characteristics of costs. It concentrates on separating costs into variable elements (where the cost per unit remains the same with total cost varying in proportion to activity) and fixed elements (where the total cost remains the same in each period regardless of the level of activity). Whilst this is not easily achieved with accuracy, and is an oversimplification of reality, marginal costing information can be very useful for short-term planning, control and decision-making, especially in a multi-product business. In a marginal costing system, sales less variable costs (regardless of function) measures the contribution that individual products/services make towards the total fixed costs incurred by the business.
A complete firm maximizes profit or minimizes loss in the short run by producing that output at which price or marginal revenue equals marginal cost, provided price exceeds minimum average v...
As can be seen from the graph all firms wishes to make maximum profit. Allocative efficiency is the best point, where Marginal cost equals to marginal revenue (Q3). All firm will like to have maximum profits where marginal cost while equals to marginal revenue (Q1). ...
The variables will have a mix of cost with profit, sales with profit or EBIT with EPS. Leverage helps to increase the profitability of the company with the use of fixed cost.
The benefits of these assumptions are that while maintaining the current growth rate of 13%; we can maintain our COGS. One of the major factors contributing to the firm’s poor profit margin is operating expenses.
The causes of the existence of such an advantage reflect the combined ability to recognize opportunity and therefore position the corporation accordingly, and produce what is wanted at a cost and therefore a price which is acceptable. Both these abilities are the result of the appropriate application of the core competencies possessed by the corporation.
Once Home Depot’s marketing plan contains a thorough description of the scissor lift, it will then focus on the branding, pricing, and distribution of the lift. The plan will also need to include a product branding and pricing strategy, as well as examine how the pricing strategy supports the branding strategy. In addition, Home Depot will prepare a distribution channel analysis from which it will create a distribution strategy, determine whether the company is going to use a push or a pull strategy, and how the distribution strategy fits the product.
...companies experienced in 2005 lower net profits than they did in the previous year of 2004, and they both also showed an increase in operating expenses, resulting in lower net profits. They both showed higher operating expenses in 2005 compared to 2004 and should modify or adjust their operations to help reduce expenses so that their profit margins will begin to increase.
well as the difference in the cost of the product and the profit it turns over is all
A change in revenues can be caused by variations in selling price, sales volume or both. Therefore, the manager should consider the effects of reduction in selling price in both relative and absolute terms to understand the future prospects of the merger. The measure of profitability as a financial measure involves considering contribution and the net profits of the organization. Contribution refers to the difference between the total sales revenue and the variable expenses incurred to produce such revenues while divisional net profit refers to contribution less any proportion of common expenses such as administration, and marketing and distribution
...hese events happen or minimize the negative impact when they happened. This will stabilize the distributable profit.
It encourages competitiveness between companies as higher profit provides more opportunity to advance the company’s agenda (Codjia, 2014).
(f) How much will the firm produce in order to maximize profits at a price