1.. Summarize the pros and cons of operating leverage? Adobe Systems, one of the largest PC software companies in the United States, dominates the graphic design, imaging, dynamic media, and authoring-tool software markets. Website designers favor its Photoshop and Illustrator software applications, and Adobe’s Acrobat software has become a standard for sharing documents online.

Adobe’s ability to manage discretionary expenses helps keep its bottom line strong. Adobe has an additional advantage:

operating leverage, the use of fixed operating costs to magnify the effect of changes in sales on earnings before interest and taxes (EBIT). Adobe and its peers in the software industry incur the bulk of their costs early in a product’s life cycle, in the research and development and initial marketing stages. The up-front development costs are fixed, and subsequent production costs are practically zero. The economies of scale are huge:

Once a company sells enough copies to cover its fixed costs, incremental dollars go primarily to profit.

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Item FY 2007 FY2008 FY2009 FY2010 FY2011 FY2012 Sales revenue (millions) $3,158 $3,580 $2,946 $3,800 $4,216 $4,404 EBIT (millions) $947 $1,089 $705 $1,000 $1,102 $1,186 (1) Percent change in sales 22.6% 13.4% -17.7% 29.0% 11.0% 4.4% (2) Percent change in EBIT 39.7% 15.0% -35.3% 41.9% 10.2% 7.6% DOL [(2) (1)] 1.8 1.1 2.0 1.4 0.9 1.7