25 4.5 Impact of Cost Structure on Cost-Volume-Profit Analysis
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- Last updated
- Dec 28, 2020
Learning Objectives
- Understand how cost structure affects cost-volume-profit sensitivity analysis.
Question: Describing an organization’s cost structure helps us to understand the amount of fixed and variable costs within the organization. What is meant by the term cost structure?
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- Question: Operating leverage15 refers to the level of fixed costs within an organization. How do we determine if a company has high operating leverage?
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Question: Why don’t all companies strive for low operating leverage to lower the break-even point?
Key Takeaway
The cost structure of a firm describes the proportion of fixed and variable costs to total costs. Operating leverage refers to the level of fixed costs within an organization. The term “high operating leverage” is used to describe companies with relatively high fixed costs. Firms with high operating leverage tend to profit more from increasing sales, and lose more from decreasing sales than a similar firm with low operating leverage.
Review problem 4.5
What are the characteristics of a company with high operating leverage, and how do these characteristics differ from those of a company with low operating leverage?
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Definitions
- The proportion of fixed and variable costs to total costs.
- The level of fixed costs within an organization.
