Skechers, U.S.A., Inc. has seen an increase in popularity that has lead to a 52.4 percent increase in sales from 2012-2013 with an increase from $1,560.3 million to $2,377.6 million. At the same time, Skechers’ saw an increase in operating income from $22.3 million to $209.0 million. In this scenario, Skechers’ is experiencing an accounting concept known as operating leverage. Operating leverage is concept that occurs when a company or project sees an increase in their operating income through a revenue increase. A company that has an increase in sales based on high gross margin and low variable costs is said to have a high operating leverage. As the operating leverage increases, so does the risk to the company through forecasting sales and potential errors in cash flow projections. Additionally,
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Variable costs fluctuate as the demand for the product as well as the sales increase or decrease over time. As the demand increases for the product, the costs of product that the company incurs will also increase. If we see an increase in sales of 5%, the cost of producing the product will increase for all expenses involved. To increase our production at this rate, we will see an increase in variable expenses regarding the production supplies that we must purchase to be able to meet the customer demand. However, we will also have to increase our production labor costs to meet the demand, by hiring on additional production staff along with the salary and benefit expenses that occur when they are hired. Labor Costs are a fixed cost for our company if we are producing at the expected rate. However, if we choose to hire no additional staff, our labor costs will change from fixed to variable based on overtime hours needed, therefore transitioning to a mixed cost. Skechers will not incur any changes to our overhead fixed costs as building rent, land taxes and any interest payments we incur will not cause any additional expenses for us due to an
Variable costs fluctuate as the demand for the product as well as the sales increase or decrease over time. As the demand increases for the product, the costs of product that the company incurs will also increase. If we see an increase in sales of 5%, the cost of producing the product will increase for all expenses involved. To increase our production at this rate, we will see an increase in variable expenses regarding the production supplies that we must purchase to be able to meet the customer demand. However, we will also have to increase our production labor costs to meet the demand, by hiring on additional production staff along with the salary and benefit expenses that occur when they are hired. Labor Costs are a fixed cost for our company if we are producing at the expected rate. However, if we choose to hire no additional staff, our labor costs will change from fixed to variable based on overtime hours needed, therefore transitioning to a mixed cost. Skechers will not incur any changes to our overhead fixed costs as building rent, land taxes and any interest payments we incur will not cause any additional expenses for us due to an