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Operating Leverage
Operating Leverage
O This case study requires that I use one of the latest financial statements to compute operating leverage, ROI, EVA and one other performance measure for my selected company. Operating leverage can be measured if the breakdown of fixed cost and variable cost in the
company operating structure in known. For the case study I have used Wal-Mart (Pharmacy) for the year to finish January 31, 2011 Revenues Variable cost $1,793,750 $18.00
For this service, Wal-Mart has teamed up with Mollen Immunizations Clinics who will actually be administering the flu shots. In this analysis I will be assuming that Wal-Mart is actually purchasing the flu shots (fixed costs) and paying a fee to Mollen for each flu shot administered
(variable costs). The time period that I am using for this analysis is a single immunization clinic, which typically runs for two weeks companywide. I will also be assuming that Wal-Mart purchases the flu shots in lots of 300, with one lot for each store. 1) Unit of measurement for the activity= one lot (300 shots) per store (4100 stores) 2) Revenue per unit for the activity = $3.50 per shot administered 3) Variable costs for the activity = $18 per shot administered 4) Fixed costs for the period in the activity = $3,075,000 Fixed Costs = $750/lot x 4100 stores = $750 x 4100 = $3,075,000 Wal-Mart charges $24 for each flu shot P = $24/shot Variable Costs = $18 fee for Mollen for each shot administered BEQ= FC/ (P-VC) = $3,075,000/ ($24-$18) = $3,075,000/ $6 = 512,500 shots/clinic
O In order for Wal-Mart to breakeven with each flu shot clinic they must administer
512,500 flu shots company wide. If Wal-Mart were to administer every shot in each lot in every store they would be administering 1,230,000 shots. The breakeven analysis demonstrates that Wal-Mart will breakeven and begins to make a profit after just over 41% of the flu shots have been administered. Because Wal-Mart has contracted with Mollen Immunizations Clinics to actually administer the flu shots, Wal-Mart should be able to generate a nice profit while investing very few resources. This is ultimately a profitable venture for Wal-Mart while also providing a valuable service for the community.