Below are the terms used to describe costs and leverage. This should help to understand the terminology in the current budget discussion. Please use this information as a reference. If there are any questions, please do not hesitate to ask.
“Operating leverage reflects the extent to which fixed assets and associated fixed costs are utilized in the business. A firm's operational costs may be classified as fixed, variable, or semivariable” (Block & Hirt, 2005, p. 2). Fixed costs are “costs that remain relatively constant regardless of the volume of operations. Examples are rent, depreciation, property taxes, and executive salaries” (Block & Hirt, 2005, p. 652). Variable costs are defined as “costs that move directly with a change in volume. Examples are raw materials, factory labor, and sales commissions” (Block & Hirt, 2005, p. 665). Semivariable costs include utilities, repairs and maintenance. They are defined as “costs that are partially fixed but still change somewhat as volume changes” (Block & Hirt, 2005, p. 656). “Financial leverage reflects the amount of debt used in the capital structure of the firm. Because debt carries a fixed obligation of interest payments, we have the opportunity to greatly magnify our results at various levels of operations” (Block & Hirt, 2005, p. 11). This leverage demonstrates the amount of debt the firm has in its capital structure. Operating leverage affects assets and impacts equipment, while financial leverage affects liabilities, net worth and how the operation will be financed. A business increases the profit by increasing leverage; however, it also increases the risk of failure.
Contribution margin is “the contribution to fixed costs from each unit of sales. The margin may be computed as price minus variable cost per unit” (Block & Hirt, 2005, p. 647). A break even analysis, “is the point where total revenue received equals the total costs associated with the sale of the product (TR=TC)” (Wikipedia,...