Please answer each discussion with 250 -300 words, APA style. DO NOT FORGET THE
CITATION!!!! Then write a response to 2 students for each discussion week with 100 words
min, and directed at them in a positive manner not in 3rd person! The other students
discussion posts can also be used as an example on how your initial post should be done.
So by the end of this assignment your should have done 1 discussions and 2 responses!!!
Read and watch all materials. Materials needed are attached!! the 24 hours are just for the
initial post, I will then extend the time to 2 additional days.
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Required Readings:
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Jiambalvo, Chapter 4
Jiambalvo, Chapter 5
Week 1 initial discussion question ( needs 250 – 300 words APA style citation)
#4 Which company would have higher operating leverage: a software company that makes large
investments in research and development or a manufacturing company that uses expensive materials and
relies on highly skilled manual labor rather than automation? Why?
Student # 1 Jami ( needs response)
Discussion Post #4
Which company would have higher operating leverage: a software company
that makes large investments in research and development or a
manufacturing company that uses expensive materials and relies on highly
skilled manual labor rather than automation? Why?
The operating leverage is the relationship between a company’s fixed and variable
costs. The higher the company’s fixed costs compared with its variable costs, the higher its
operating leverage (Motley Fool Staff, 2010).
“A firm can invest in an automated production system using robotics, thus
increasing it fixed costs while reducing labor which is a variable cost (Jiambalvo, J.
2016).” Concentrating on more fixed assets increases the operating leverage in a
company. Because this specific manufacturing company is opting to use expensive
materials and highly skilled manual labor in lieu of automation, they are going to
have higher variable costs. The variable costs are related to the manual labor
where the fixed assets refer to the automation.
Additionally, since this company, if choosing to pour its funds into materials and
labor and not capital, they’re not considered capital-intensive either which also
plays into their operating leverage.
The software company’s cost structure is most likely to be fixed and limited to
upfront research and development. Because of this, whether they sell one copy or
one hundred copies of its software, their cost remains basically unchanged. Once
the company has sold enough to cover its fixed costs, each copy thereafter, will
contribute to its bottom line and in turn, increasing its operating leverage.
References
Jiambalvo, J. (2016). Managerial Accounting: ebook (6th ed.). Hoboken, NJ: John Wiley
& Sons.
Motley Fool (2010) A Look at Operating Leverage: Examining the cost structures of Costco and IPG
Photonics.
Retrieved from: https://www.fool.com/investing/general/2010/08/19/a-look-atoperating-leverage.aspx
Student # 2 Hyon ( needs response) will upload as soon as someone post
#2. John Diaz owns Pacific-Electric , a large electrical contracting firm that provides services to
building construction projects. The company has 2,000 employees and operates in three western
states. Recently the company experienced large losses due to a downturn in the economy and a
slowdown in construction. John thinks the losses were particularly large because this company has
too much fixed cost. Expand on John's thought. How are the large losses related to fixed
costs? Identity a way that John can turn potential fixed costs into variable costs.
To expand on Johns thought that losses were particularly large because the
company has too much fixed cost, it appears that the company has a high
operating leverage. The operating leverage “relates to the level of fixed versus
variable costs” of the company’s cost structure (Jiambalvo, 2016). What this
ultimately means is when sales are high, it leads to a large fluctuation in profit, but
when sales are low, profits dip dramatically. I've made a scenario breakdown from
the example provided in Ch. 4 below. This is the reason why a company with high
operating leverage are considered more riskier than one with more variable costs.
Scenario 1: Firm 1 and 2 make same profit
at $10m sales
Firm 1
Firm 2
$ 10,000,000
$ 10,000,000
Variable cost
5,000,000
7,000,000
Contribution margin
5,000,000
3,000,000
Fixed costs
3,000,000
1,000,000
Sales
Profit
$ 2,000,000
$ 2,000,000
Scenario 2: 20% increase in sales; Firm 1 has higher profit
Firm 1
Firm 2
$ 12,000,000
$ 12,000,000
Variable cost
6,000,000
8,400,000
Contribution margin
6,000,000
3,600,000
Fixed costs
3,000,000
1,000,000
Sales
Profit
$ 3,000,000
$ 2,600,000
Scenario 3: 20% decrease in sales; Firm 1 has lower profit
Firm 1
Firm 2
$ 8,000,000
$ 8,000,000
Variable cost
4,000,000
3,600,000
Contribution margin
4,000,000
4,400,000
Sales
Fixed costs
Profit
3,000,000
$ 1,000,000
1,000,000
$ 3,400,000
In order for John to turn potential fixed costs into variable costs, he can introduce
incentive compensation and outsourcing. With employee salary, which is a fixed
cost, offering a lower base salary with incentive compensation with a percentage of
sales will convert a fixed compensation into a partially variable cost. John can
outsource functions that relate to fixed cost activities such as customer call center
and payroll. Outsourcing allows John to convert what would normally be a fixed
cost to employee salary to a variable cost, say based on how many calls are taken.
Jiambalvo, James, (2016). Managerial Accounting (6th ed.), Hobroken, NJ: John Wiley &
Sons, Inc.
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