Home Depot Executive Summary

Home depot was drastically affected by the housing market crash and their numbers showed it; a few things can explain their numbers such as operating leverage, margin of safety, and cost behavior (Edmunds, Tsay, & Olds, 2011). The company announced that they suffered a 3% percent decrease in revenue in the first half of 2007 compared to the same time -frame in 2006; in addition to the 3% decreases in revenue they also suffered a 21% decline in profits. The 3% decline in revenue contributed to the decrease in profit in terms of operating leverage on profitability as revenues earned have to first cover that companies fixed cost and once the fixed costs are covered any additional revenue is pure profit. Comparing the numbers to the previous year the 3% decline in revenue lead to a 21% decrease in profit because they did not have as much revenue remaining after the fix costs were covered. Margin of safety is the difference in sales goal and breaking even; falling outside of the difference can result in a loss in profits. This affected home depot fell short of the margin of safety cushion and instead of breaking even if they incurred a lost. Lastly, cost behavior plays a role because there are three types of cost behaviors, fixed costs, which are costs that do not change, variable costs, which are costs that do change, and mixed costs, which are costs that include some variable and fixed costs. Businesses try to control their costs when there are unforeseen changes occurring that they cannot control (Halzhacker, Krishnan, & Mahlendork, 2015). …show more content…
When the housing boom slowed down Home Depot sales decline that falls in the variable costs; however, their fixed costs stayed the same and because the fixed costs stayed constant and there was a decline in variable costs that not only affected the revenue but drastically affected their profits (Edmunds, Tsay, & Olds,