A significant financial change has occurred in the operation of Home Depot for 2006 as well as the year 2007 (Edmonds, Tsay & Old, 2011). This memorandum will focus on three concepts to help us see why these changes occurred during these two years; first, we will look at margin of safety, secondly, the operating leverage, and thirdly, cost behavior (Edmonds, Tsay & Old 2011). Let us also keep a clear focus and a sensitivity of consideration to outside forces that historically affected the Home Depot corporation starting with a volatile housing market in the early twenty-century as the American housing market boomed, the large supply and demand for materials, the slowing of the housing market until the housing slump in 2006 (Crash, 2013). …show more content…
The demand for home improvement supplies brought in significant profits (Uchitelle, 2009). Home Depot average earning was $423 per square foot and profits in the billions as they continued to seek land to build more stores (Uchitelle, 2009), however, in 2006, the housing market was slowing dramatically, and now, over-expansion was becoming a concern (Uchitelle, 2009). By 2006, Home Depot was down in terms of sales at $350 by the square foot, and by the year 2007 sales were down even further to the point that their stores were only generating $300 a square foot (Uchitelle, …show more content…
The 2006 report shows that the store count was at 2147 and within two years another 87 stores where added (Annual Report, 2006-7), furthermore. we can see evidence of cost behavior as each store had total liabilities, while the annual report shows total liabilities ranging 2006 at 26.6 and in 2007, 27.2 (Edmonds, Tsay & Old, 2011). When Home Depot spoke in terms of a "greater concern" and those earnings for the first half of 2007 were 21 percent lower as they took their Safety of Margin into consideration they had every right to be worried (Edmonds, Tsay & Old, 2011). For one, Home Depot's managerial accountant concern stemmed from an investment point of view simply because the market price was falling at face value due to the fact people were not going out buying and building homes (Crash, 2013). Another factor that Home Depot had to consider was their operating leverage if we think of each new Home Depot as a product, what is calculated that each store on average would have to bring 27 billion dollars annually (Annual Report, 2006-7). In closing, as we can see Home Depot had a 3% drop in sales affecting its operating leverage, while variable cost rose eventually causing a drop in profit (Edmonds, Tsay