Operating Leverage

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COST BEHAVIOR: To get a better handle on cost behavior, what are some specific examples of variable, fixed, and mixed (semi-fixed) costs in our own personal lives. Great discussion and great examples! A great example how one thing can be variable, fixed, or semi-fixed depending on the choice of plan: My cell phone bill is an example of a fixed cost. The bill is always the same because usage always falls within the relevant range. The cost is predictable. An example of a variable cost rate would be a pay-as-you-go phone card where you pay for minutes in increments. No matter how many minutes I talk on my phone the bill remains the same. If I used a pay-as-you-go phone, the cost for each 100 minutes may be the same but my total cost would vary based on the amount of 100 minute increments I purchased. A semi-fixed cost would be a data plan on a cell phone where the price is fixed up to a point and then you pay incrementally for data blocks that are over your plan limit. To go a step farther, you can consider how your personal costs and income match up. Are most of your costs and income fixed? Then planning is easy. If you have fixed income, but many variable costs, watching those costs is crucial. Dealing with variable income, and a high proportion of fixed costs can also be challenging. A few points to remember: 1) In the long run, all costs can be variable (do we build that building?, do we hire that salaried employee?, do we rent that space?, etc.) 2) Don’t confuse the payment of an expense with the behavior of the cost itself (utilities offer ‘budget’ billing, where you pay the same amount each month, but the underlying cost is a mixed cost). 3) Just because a cost varies from period to period does not mean it is a ‘variable’ cost (like a variable rate mortgage). Variable costs vary, based on the level of activity. 4) Variable costs can appear fixed if the activity…...

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