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Business Analysis with Microsoft® Excel, Second Edition by Conrad Carlberg

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Analyzing Leverage Ratios

The term leverage means the purchase of assets with borrowed money. Chapter 14, “Planning Profits,” goes into this subject in detail. For now, consider this example: suppose that your company retails office supplies. When you receive an order for business cards, you pay one of your suppliers 50% of the revenue to print them for you. This is a variable cost: the more you sell, the greater your cost.

But if you purchase the necessary printing equipment, you could make the business cards yourself. So doing would turn a variable cost into a largely fixed cost: no matter how many cards you sell, the cost of printing them is fixed at however much you paid for the printing equipment (apart from consumables such as paper stock). ...

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