{"id":17218,"date":"2021-07-08T19:57:03","date_gmt":"2021-07-08T19:57:03","guid":{"rendered":"https:\/\/analystprep.com\/study-notes\/?p=17218"},"modified":"2026-06-30T19:01:29","modified_gmt":"2026-06-30T19:01:29","slug":"analyzing-operating-margins-and-sales-levels","status":"publish","type":"post","link":"https:\/\/analystprep.com\/study-notes\/cfa-level-2\/financial-reporting-and-analysis-fra\/analyzing-operating-margins-and-sales-levels\/","title":{"rendered":"Analyzing Operating Margins and Sales Levels"},"content":{"rendered":"<script type=\"application\/ld+json\">\r\n{\r\n  \"@context\": \"https:\/\/schema.org\",\r\n  \"@type\": \"QAPage\",\r\n  \"mainEntity\": {\r\n    \"@type\": \"Question\",\r\n    \"name\": \"Which of the following is least likely a factor that leads to economies of scale?\",\r\n    \"answerCount\": 3,\r\n    \"acceptedAnswer\": {\r\n      \"@type\": \"Answer\",\r\n      \"text\": \"The correct answer is C. Fixed costs. Fixed costs themselves do not create economies of scale. Instead, economies of scale arise when increasing production spreads fixed costs over a larger number of units, reducing the average cost per unit. Greater bargaining power with suppliers and a lower cost of capital can both contribute to economies of scale by reducing a firm's overall operating and financing costs.\"\r\n    },\r\n    \"suggestedAnswer\": [\r\n      {\r\n        \"@type\": \"Answer\",\r\n        \"text\": \"Greater bargaining power with suppliers.\"\r\n      },\r\n      {\r\n        \"@type\": \"Answer\",\r\n        \"text\": \"Lower cost of capital.\"\r\n      },\r\n      {\r\n        \"@type\": \"Answer\",\r\n        \"text\": \"Fixed costs.\"\r\n      }\r\n    ]\r\n  }\r\n}\r\n<\/script>\r\n<p><iframe loading=\"lazy\" src=\"\/\/www.youtube.com\/embed\/M-Yp1rD9Kf0\" width=\"611\" height=\"343\" allowfullscreen=\"allowfullscreen\"><\/iframe><\/p>\r\n\r\n\r\n<p>Analysts usually consider costs at a more aggregate level than the level used to analyze revenue and use a top-down, bottom-up, or hybrid approach when forecasting them. Variable costs are linked to revenue growth and may be modeled as a percentage of revenue or a projected product volume multiplied by product variable costs. However, fixed costs are not related to revenues but to investments in property, plant &amp; equipment (PPE). They may be assumed to grow at their rate.<\/p>\r\n\r\n<div style=\"margin: 18px 0;\"><a style=\"display: block; text-align: center; padding: 14px 18px; border: 2px solid #2F5BFF; border-radius: 18px; color: #ffffff; font-weight: 600; font-size: 16px; text-decoration: none; background-color: #1a73e8;\" href=\"https:\/\/analystprep.com\/free-trial\/\" target=\"_blank\" rel=\"noopener noreferrer\">Practice operating margin and sales analysis with our CFA Free Trial.<\/a><\/div>\r\n\r\n<p>Analysts should determine whether the company benefits from economies of scale. Economies of scale occur when average costs per unit fall as volume rises. Factors that lead to economies of scale include:<\/p>\r\n<ul>\r\n\t<li>Greater bargaining power with suppliers.<\/li>\r\n\t<li>Lower cost of capital.<\/li>\r\n\t<li>Lower per-unit advertising expenses.<\/li>\r\n<\/ul>\r\n<p>Gross and operating margins are positively correlated with sales levels in an industry that enjoys economies of scale.<\/p>\r\n<blockquote>\r\n<h2>Question<\/h2>\r\n<p>Which of the following is <em>least likely<\/em> a factor that leads to economies of scale?<\/p>\r\n<ol style=\"list-style-type: upper-alpha;\">\r\n\t<li>Greater bargaining power with suppliers.<\/li>\r\n\t<li>Lower cost of capital.<\/li>\r\n\t<li>Fixed costs.<\/li>\r\n<\/ol>\r\n<h4>Solution<\/h4>\r\n<p>The correct answer is<strong> C<\/strong>.<\/p>\r\n<p>Fixed cost is <strong><em>not<\/em> <\/strong>a factor that leads to economies of scale. Fixed costs are expenses that are not directly related to revenue, for example, investments in property, plant &amp; equipment (PPE).<\/p>\r\n<p><strong>A is incorrect<\/strong>. Greater bargaining power with suppliers is a factor that leads to economies of scale. A company with bargaining power with suppliers can negotiate better prices with the suppliers.<\/p>\r\n<p><strong>B is incorrect<\/strong>. Lower cost of capital is a factor that leads to economies of scale. Lower cost of capital enables a company to have cheaper access to funds, lowering their overall costs.<\/p>\r\n<\/blockquote>\r\n<p>Reading 17: Financial Statement Modeling<\/p>\r\n<p><em>LOS 17 (c) Evaluate whether economies of scale are present in an industry by analyzing operating margins and sales levels.<\/em><\/p>\r\n\r\n<div style=\"text-align: center; margin: 30px 0;\"><a style=\"display: inline-flex; align-items: center; justify-content: center; padding: 12px 26px; border-radius: 9999px; background: #1e5bd8; color: #ffffff; font-weight: bold; text-decoration: none;\" href=\"https:\/\/analystprep.com\/free-trial\/\" target=\"_blank\" rel=\"noopener noreferrer\"> Start Free Trial \u2192 <\/a> <p style=\"margin-top: 12px; font-size: 16px; line-height: 1.5;\">Review how to analyze operating margins and sales levels with CFA Level 2 study notes, practice questions, mock exams, and video lessons designed to strengthen your exam preparation.<\/p>\r\n<\/div>","protected":false},"excerpt":{"rendered":"Analysts usually consider costs at a more aggregate level than the level used to analyze revenue and use a top-down, bottom-up, or hybrid approach when forecasting them. Variable costs are linked to revenue growth and may be modeled as a...","protected":false},"author":5,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[102,312],"tags":[216,402,430,429],"class_list":["post-17218","post","type-post","status-publish","format-standard","hentry","category-cfa-level-2","category-financial-reporting-and-analysis-fra","tag-cfa-level-2","tag-equity-valuation","tag-financial-modeling-income-statement-operating-costs","tag-reading-26-industry-and-company-analysis","blog-post","no-post-thumbnail","animate"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v27.6 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Operating Margins &amp; Sales Analysis | CFA Level II<\/title>\n<meta name=\"description\" content=\"Learn how to forecast costs using top-down, bottom-up, or hybrid approaches, and assess 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