The Fast Forward MBA in Finance

are the same for both internal and external financial reports.

Variable operating expenses

The interval of time from acquisition of the product to the sale of the product equals one inventory turnover.

Profit is measured and recorded by one set of methods, whi

Variable operating expenses are separated from fixed operating expenses, and the variable expenses are divided into revenue-driven versus unit-driven. This three-way classification of operating expenses is the key difference between the external and internal profit reports.

In general, variable means that an expense varies with sales activity—either sales volume (the number of units sold) or sales revenue (the number of dollars generated by sales).

ratios are part of the language of business.

Fixed means that these operating costs, for all practical purposes, remain the same for the year over a fairly broad range of sales activity—even if sales rise or fall by 20 or 30 percent. Examples of such fixed costs are employees on fixed salaries, office rent, annual property taxes, many types of insurance, and the CPA audit fee.

Bottom-line profit (net income)

Before walking through the analysis of the proposal to cut sales prices by 5 percent to gain a 25 percent increase in sales volume, it is important to thoroughly understand the behavior of operating expenses.