Operational Levarage

Topics: Rate of return, Investment, Cost Pages: 4 (979 words) Published: February 23, 2013
Trident University International
Rey F. Guzman
Accounting for Decision Making (ACC-501)
Module 5 SLP Operational Leverage
Dr. Timothy Brown
27 January, 2013

This SLP requires to do some research to learn about operating leverage, ROI, EVA, and another performance measure of your choice. Note that there are variations in the computations of a particular measurement. Using the information from the latest financial statement for a company to compute the measurements researched. Reflect on the advantages and disadvantages of these performance measures. Choose a preferred measure and explain the rationale.

Economic Value Added (EVA)
A measure of a company's financial performance based on the residual wealth calculated by deducting cost of capital from its operating profit (adjusted for taxes on a cash basis).(Also referred to as "economic profit".)

The formula for calculating EVA is as follows:
= Net Operating Profit After Taxes (NOPAT) - (Capital * Cost of Capital)
Unfortunately, unless you are a company insider, it can be very difficult to acquire all of the information necessary to measure a company's DOL. Consider, for instance, fixed and variable costs, which are critical inputs for understanding operating leverage. It would be surprising if companies didn't have this kind of information on cost structure, but companies are not required to disclose such information in published accounts.

Return On Investment (ROI)
A performance measure used to evaluate the efficiency of an investment or to compare the efficiency of a number of different investments. To calculate ROI, the benefit (return) of an investment is divided by the cost of the investment; the result is expressed as a percentage or a ratio.

The return on investment formula:

In the above formula "gains from investment", refers to the proceeds obtained from selling the investment of interest. Return on investment is a very popular...
Continue Reading

Please join StudyMode to read the full document

You May Also Find These Documents Helpful

  • Operational Risks in Childcare Essay
  • Essay about Country Risk and Operational Risk: Types of Debts Influencing the Systematic Risk
  • Risk definitions Essay
  • Essay about Operational Risk in Payment System
  • Operational Risk and Toyota Essay
  • Operational Risk Management Essay
  • Scenario Analysis for Basel Ii Operational Risk Management Essay
  • Strengthening Operational Risk Management Through Effective Loss Management Essay

Become a StudyMode Member

Sign Up - It's Free