Los 43.d

Question 1

What are operating costs?

Answer 1

Costs that a company incurs in generating current period revenue

Question 2

How can we Categorize them?

Answer 2

By their relationship with output (fixed or variable)
By nature (e.g., work in process, utilities, promotion)
By function (e.g., selling, advertising, travel, income tax)

Question 3

How do you work out operating profit

Answer 3

Q * (P-VC) - FC

Question 4

What is a contribution Margin

Answer 4

P-VC

Question 5

What is operating leverage?

Answer 5

Ratio that measures how much a companys operating income changes with revenue
Calculation = & change in Operating Profit / % change in Sales
A firm can increase this by increasing the fixed cost and decreasing variable cost in its cost base

Question 6

What is a functional cost classification in accounting?

Answer 6

Classifying costs based on business functions (e.g., cost of sales, selling, general, and administrative). Promotes consistency in income statement presentation.

Question 7

Name three common metrics for operating profitability.

Answer 7

Gross profit, EBITDA (earnings before interest, taxes, depreciation, and amortization), and EBIT (earnings before interest and taxes/operating profit).

Question 8

How do you calculate gross profit, EBITDA, and EBIT?

Answer 8

Gross profit = Revenue - Cost of Sales
EBITDA = Gross Profit - Operating Expenses
EBIT/Operating Profit = EBITDA - Depreciation and Amortization

Question 9

What are gross margin, EBITDA margin, and EBIT margin?

Answer 9

They are profitability ratios calculated by dividing gross profit, EBITDA, and EBIT, respectively, by revenue.

Question 10

How do fixed and variable costs relate to functional cost classifications?

Answer 10

They overlap but are not identical. Cost of sales is often largely variable, while many operating expenses are primarily fixed.

Question 11

What drives operating costs?

Answer 11

Primarily the level of output. Variable costs directly, and fixed costs indirectly (increased output eventually requires more fixed asset investment).

Question 12

What primarily determines industry profitability?

Answer 12

Competition among companies within the industry.

Question 13

Define economies of scope.

Answer 13

Decreasing unit costs by adding divisions or product lines that share costs and reduce redundancie

Question 14

What does the ratio of net working capital to sales indicate?

Answer 14

A positive ratio means working capital is financed internally; a negative ratio indicates external financing (e.g., from suppliers).