By Pijarinee Jarussirirat ID MA0N0207 Book: Page 553

 The potential use of fixed operating costs to magnify the effects of changes in sale on the firm’s earnings before interest and taxes (EBIT)

Sale revenue – Variable operating costs – Fixed operating costs = EBIT P= sale price per unit Q=Sale quantity in units FC=Fixed operating cost per period VC=variable operating cost per unit

The up-front development costs are fixed production costs are approximately zero (Variable operation cost = 0)

 Once a company sells enough copies to cover its fixed costs, incremental dollars go primarily to profit  Because the company has no long-term debt in it’s capital structure  It’s total leverage is derived only from FC EBIT Sales FC

ItemFY2002FY2003FY2004FY2005FY2006 Sales revenue (millions) $1165$1295$1666$1966$2575 EBIT (million) (1)% change in sales-5.3%11.2%28.6%18.0%31.0% (2)% change in EBIT-24.6%33.3%60.0%26% -11.5% DOL (2÷1)

The acquisition of Macromedia for approximately 3.5 billion Huge fixed cost so minus in equation is very huge money to make Operating leverage decrease (minus)

 So changes fixed cost is the cause of the gradual decrease in operating leverage for Adobe