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Chapter 12

Chapter 12. Adobe’s Leverage. By Pijarinee Jarussirirat ID MA0N0207. Book: Page 553. Adobe Family Full Preview. Operating leverage. 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).

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Chapter 12

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  1. Chapter 12 Adobe’s Leverage By PijarineeJarussirirat ID MA0N0207 Book: Page 553

  2. Adobe Family Full Preview

  3. Operating leverage • 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)

  4. Earnings before interest and taxes :EBIT Sale revenue – Variable operating costs – Fixed operating costs = EBIT EBIT= (P*Q)-(VC*Q)- FC EBIT = sales- VC -FC P= sale price per unit Q=Sale quantity in units FC=Fixed operating cost per period VC=variable operating cost per unit

  5. Measuring the degree of operating leverage (DOL) EBIT = sales- VC -FC

  6. Adobe’s leverage • The up-front development costs are fixed • production costs are approximately zero (Variable operation cost = 0) EBIT= Sale-0- FC

  7. The economies of scale are huge EBIT= Sales - VC - FC • 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

  8. What might cause the gradual decrease in operating leverage for Adobe?

  9. December 2005 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) -EBIT= Sales - FC

  10. Answer • So changes fixed cost is the cause of the gradual decrease in operating leverage for Adobe

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