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XYZ Corp: Fixed Costs vs. Variable Costs scenarios

What happens in the following COMPARED to sheet 1 (Please Review the attached Spreadsheet):

1) When fixed costs are higher and variable costs are lower,

a) does the breakeven revenues go up or down?

b) does the degree of operating leverage (DOL) go up or down?

c) does projected profit for years 2 through 5 increase or decrease?

2) When fixed costs are lower and variable costs are higher,

a) does the breakeven revenues go up or down?

b) does the degree of operating leverage (DOL) go up or down?

c) does projected profit for years 2 through 5 increase or decrease?

3) In what scenarios with your company would you want to change your fixed costs to be higher and your variable costs to be lower - -OR visa versa?

Please give a detailed response.

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1) When fixed costs are higher and variable costs are lower,

a) does the breakeven revenues go up or down?

breakeven quantity = (Fixed cost + Dep.) / (Price - unit variable cost)
= (Fixed cost + Dep.) / (Price - variable cost / units sold)
If we increase fixed cost and decrease variable cost, the breakeven quantity will increase.
Then breakeven revenue (= breakeven quantity * price) will also go up.

b) does the degree of operating leverage (DOL) go up or down?

degree of operating leverage= (Revenue - variable cost) / EBIT
= (Revenue - variable cost) / (Revenue - variable cost - fixed cost)
then the increase in fixed cost will raise DOL.

c) ...

Solution Summary

In a 458 word solution, the response provides good explanations for the answers together with calculations as appropriate.

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