If this sales amount is feasible, then you have a sales target to work towards. However, if it is not feasible, you should consider:
1. Increasing or decreasing the sales price 2. Identifying areas where you could make changes to fixed and / or variable costs
� Operational Gearing 2
�
Operational gearing is the effect of fixed costson the relationship between sales and operating profits. If there isno operational gearing, then operating profit would rise at the same rate as sales growth( assuming nothing else changed).
� Operational gearing is simple and important- and often neglected.
� High fixed costs increase operational gearing.
Consider the following example:
1. Two enterprises with different cost structures but the same profits
2. Now suppose they both increase their sales by 50 %
Enterprise A Enterprise B Enterprise A Enterprise B
Sales 1,000,000 1,000,000 1,500,000 1,500,000
Variable Costs 700,000 800,000
( 700,000 + 350,000) 1,050,000
( 800,000 + 400,000) 1,200,000
Fixed Costs 200,000 100,000 200,000 100,000
2 This section is adapted from http:// moneyterms. co. uk / operational _ gearing /
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