33:390:430 Lecture Notes - Lecture 5: Operating Leverage, Fixed Cost, Financial Analysis
1 Oct 2018
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Document Summary
A dollar today is worth more than a dollar tomorrow. Varies with changes in a particular operating or financing activity. Treated as a lump sum ex: maintenance fee. Fee stays the same regardless of the # of transactions. Chapter 19: financial planning and analysis: time value of money. Future value (fv): fv = pv x (1 + r)t. Present value (pv): pv = fv / (1 + r)t: cost behavior. Cost behavior: the relationship between costs and business activities (cost drivers) Fixed costs: do not vary with quantity/activity, not immediately impacted by changes in activities. Variable costs: changes in direct proportion to the level of business activity. Determined by the extent fixed costs are used in the company"s operating cost structure. High fc & low vc: company will make a great profit once fc is covered. Higher proportion of fixed costs higher operating leverage. High o. l. usually tied to equipment intensive companies. Large profit increase w/ increase in revenues.
