Home Depot Financial Analysis
Companies all over the globe will experience some sales and profit decrease. Home Depot in the growing housing industry benefited greatly from the houses being built. The accounting concept portrayed in this situation for home depot is called operating leverage. Operation leverage is when managers view a small change in revenue and magnify it to dramatic changes in revenue (Edmonds, Tsay, & Olds, 2011). With a decrease in the market for construction materials, Home Depot is experiencing a 3% decrease revenue and a 21% decrease in profitability. This drastic change occurred because of variable and fixed costs. Due to these costs, sales decline in small percentages which affect a more significant decline in profit. Furthermore, incurred cost within Home Depot is broken down into two different types. These two different types are variable costs and fixed costs. To understand expenses, a manager has to understand the difference between these two costs (Willson, 2014). Fixed costs are constant, which means that no matter how much Home Depot is producing. Fixed costs include rent or utilities. Variable costs are costs that change depending on the amount of output. As total expenses increase for Home Depot, their fixed costs remain the same, which in return will decline profitability. In conclusion, the margin of safety is the buffer between projected sales and the break-even …show more content…
P., Tsay, B., & Olds, P. R. (2011). Fundamental managerial accounting concepts (6th ed.). New York, NY: McGraw-Hill Irwin. WILLSON, T. (2014). Finding Budget Flexibility - or Not: The Impact of Fixed and Variable Cost. Armed Forces Comptroller, 59(2), 31-34. Ciftci, M., Mashruwala, R., & Weiss, D. (2016). Implications of Cost Behavior for Analysts ' Earnings Forecasts. Journal Of Management Accounting Research, 28(1), 57-80. doi:10.2308/jmar-51073. Edmonds, T. P., Tsay, B., & Olds, P. R. (2011). Fundamental managerial accounting concepts (6th ed.). New York, NY: McGraw-Hill
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