Home Depot Fixed Cost Analysis Paper

During the housing boom, Home Depot expanded by adding more and more brick and mortar stores to meet the needs of customers. Expansion created additional fixed costs. The cost behavior of Home Depots fixed costs remain constant. If Home Depot has fixed costs of $120,000 per year, the cost remains constant despite the volume of building supplies sold. Home Depot does not operate on per-unit fixed costs but rather a total fixed. The company also incurred a larger variable cost. The labor of hourly workers, utilities, etc. would be increased as new stores are opened. Suppose that variable costs are $60,000. Operating leverage explains how the decline of 3% in sales causes a 21% decline in profits because as a percentage a company’s earnings

A higher fixed cost leads to increase in operating leverage and can increase operating risk (Irvine, Park, & Yildizhan, 2016). During the housing boom, Home Depot may have also experienced a large margin of safety. The margin of safety is the amount of money that is received over the break-even amount. It is calculated by Sales - Sales at Break-Even Point/ Sales. If fixed costs are $120,000 and variable costs $60,000, Home Depot’s break-even amount would be $180,000. Anything after $180,000 would be profit. If Home Depot’s sales are $200,000 per year. The company would earn $20,000. They would have a margin of safety of 10%. If sales dropped 3%, they would total $194,000. If the variable cost remained the same break-even would still be $180,000. The company would earn revenue of $14,000 with a 7% margin of safety. This would be a 30% reduction in earnings compared to the prior year of $20,000. The variable costs were adjusted to match the 3% in loss of sales making variable costs $58,200. This could have come in the form or layoff, reduction of hours, etc. When reducing variable costs to match the 3% loss in sales, revenue would be $15,800 which would total to a 21% loss of earnings when compared to the prior year of $20,000