Impact of Cost Structure on Cost-Volume-Profit Analysis

Read section 6.4, which explores the effects that various loads of fixed costs have on CVP analysis. The amount of fixed costs (cost structure) that a company carries is often established by the type of industry it operates in. The cost structure of a firm describes the proportion of fixed and variable costs to total costs. Operating leverage refers to the level of fixed costs within an organization. The term "high operating leverage" is used to describe companies with relatively high fixed costs. Firms with high operating leverage tend to profit more from increasing sales, and lose more from decreasing sales, than a similar firm with low operating leverage