money used by a company, provided by the shareholders or

by loans

to provide money to pay for something

the study of how money is managed and the actual process

of acquiring needed funds.

the management of large amounts of money, especially by

governments or large companies

A firm’s use of assets & liabilities using fixed costs in an attempt to rise potential returns to shareholders

use of assets consuming fixed costs. The use of fixed operating costs by the firm.

use of liabilities & preferred stock consuming fixed costs.

The use of fixed financing costs by the firm.

The British expression is gearing.

Costs of sales

General admin, & selling expenses

interest charges

Preferred dividends

Income taxes

Costs that change in close relationship to variations in sales are named as variable costs. changes in total in proportion to

changes in the related level of volume. on a per-unit basis variable cost remain constant.

Cost is a resource sacrificed or

forgone achieve specific objective.

is the cost incurred (a historical

cost)

as distinguished from budgeted

costs.

a cost that has occurred

persist unchanged in total

irrespective of changes in the

related level of volume. with

the level of production it change

inversely .

Can be identified

specifically with a

particular final cost

objective i.e., a particular

award, service or direct

activity

Incurred for common or

joint objectives and cannot

be readily identified with a

particular final cost

objective

Cannot be easily

identifiable.

Direct

Fixed

Indirect

Variable

The percentage change in a firm’s operating

profit (EBIT) resulting formal present change

in output (sales).

Calculating the DOL for a single product or a single-

product firm.

Q (P - V)

Q (P - V) - FC

=

The percentage change in a firm’s earnings per share

(EPS) resulting from a 1 present change in operating

profit.

.

EBIT = Earnings before interest and taxes

I = Interest

PD = Preferred dividends

t = Corporate tax rate

DTL S dollars

of sales=

EBIT + FC

EBIT - I - [ PD / (1 - t) ]

DTL Q units =Q (P - V)

Q (P - V) - FC - I - [ PD / (1 - t) ]

determine the level of sales a firm must achieve to stay

in business in the long run

Shows the mix of fixed and variable cost and the

volume required for zero profit/loss

Profit/loss generally measured by EBIT (operating

profit/loss)

Using an algebraic calculation as a formula for earnings

before interest and taxes yields:

EBIT = (P x Q) – FC – (VC x Q)

EBIT = Q x (P – VC) – FC

Setting EBIT equal to $0 and solving for Q (the firm’s

breakeven point) yields:

Every sale makes a ‘contribution’ per unit of the

difference between price (P) and variable cost (V)

Ct = P – V

Can be expressed as a percentage of the price

Known as the contribution margin (CM)

CM = (P – V) / P

cost

Fixed cost

Over head

Admin cost

Wages

premises

Variable

cost

Raw material

Labour

components

Break-even point =

Fixed costs

Selling price (per unit) – variable cost (per unit)

EBIT-EPS Break-Even Analysis -- Analysis of the

effect of financing alternatives on earnings per share.

The break-even point is the EBIT level where EPS is

the same for two (or more) alternatives.

EPS(EBIT - I) (1 - t) - Pref. Div.

# of Common Shares

Leverage results from the usage of fixed costs to expand

returns to firm’s owners. the mixture of debt and equity,

affects leverage and value of firm. to measure total

operating costs & level of sales Breakeven analysis is

necessary