Generally speaking If fixed costs rise (ie PPE increases) will variable costs fall ?
Generally speaking is COGS mostly or nearly all made up of variable costs ?
More importantly, how do you forecast the effect of operating leverage on profit ? (assuming you have revenue forecasts) Any examples on the web?
Thanks for any help
Not necessarily. It depends on the reason that fixed costs increase.
That depends on the nature of the product or service you sell. It could be mostly variable costs, mostly fixed costs, or about equal amounts.
Generally you will forecast variable costs and fixed costs separately. Their relative trends will tell you whether DOL is increasing or decreasing.
I’m not sure I was much help, but you’re welcome.
Opearating leverage involves using a large proportions of fixed costs to variable costs in the oparations of the firm . The higher the DOL the more sensitive will be to change in the EBIT to change in the sales . The ratio helps the user in determining the effects that a given level of operating leverage has on earnings potential of the firm.
does it? Does the proportion of fixed cost have to be high in relation to variable cost before it is ‘operating levered’? I think once there is fixed and variable costs, the company has operating leverage, which is higher determines the degree. I think.