COST STRUCTURE AND
The slowing of commercial activity and technology invest-
ments in the early 2000s radically altered the income pro-
jections of many firms. These economic changes and their
resulting impacts demonstrate a valuable managerial lesson
about the impact of cost structure on profitability.
Managers at firms such as Inktomi, Microsoft, Yahoo,
Cisco Systems, Amazon.com, and Webvan spent heavily on
new product development in years leading up to the down-
turn of the early 2000s. These investments financed projects
such as software development, new hardware technologies,
Internet marketing, Web site development, and automated
warehouses. The investments generated additional produc-
tive and service capacity, but their cost structures were dom-
inated by high fixed costs. These fixed costs resulted from
both the need to maintain the technology supporting exist-
ing systems and the investment necessary to develop the next
generation of hardware and software.
In an expanding market, managers take advantage of
fixed costs to generate profitable growth since additional
■ L E A R N I N G O B J E C T I V E S
After completing this chapter, you should be able to:
Identify the uses and limitations of traditional
LO2 Prepare and contrast contribution and
functional income statements.
LO3 Apply cost-volume-profit analysis to find a
break-even point and for preliminary profit
LO4 Analyze the profitability of a multiple-product
firm with a constant sales mix.
LO5 Apply operating leverage ratio to assess
opportunities for profit and the risks of loss.
LO6 Analyze the profitability of organizations that
operate with unit and nonunit cost drivers.
Ch 03_Morse.qxd 4/22/05 6:08 PM Page 70
Photomondo/Getty Imagescustomers do not add much additional costs. In this case, a
cost structure dominated by fixed costs is a smart managerial
In an unstable or declining economy, however, a high