Estimate the five operating expenses for each of the past three fiscal Essay

Estimate the five operating expenses for each of the past three fiscal years, and evaluate what operating leverage, if any, was utilize each year - Essay ExampleAccording to both financial statements the five costs are Cost of Revenue, Research and tuition, Selling General and administrative Expenses, Non-Recurring and Others. For the sake of simplicity, Cost of Revenue and Selling, General and Administration Expenses would be regarded as Variable Cost and the other expenditure as Fixed Cost.From the Income Statement straighten up for 2003 (Fig 2), it is clear that PFIZER operated with a higher degree of operating leverage than GlaxoSmithKline. This is evident in the companys obdurate cost percentage as PFIZERs fixed cost business office is 2% higher that its competitor. The position that PFIZER has a substantial amounts of capital tied up in its fixed assets and in particular in Research and Development Expenditure, would account for its higher operating leverage. It should be of no surprise therefore, that PFIZERs Research and Development accounts for over 50% of its total fixed cost. GlaxoSmithKline may puzzle been a little more conservative since its Research and Development Expenditure spans only 5% of its total fixed cost.The strategy therefore would be for PFIZER to reduce its fixed cost percentage and thus enable itself to manage its risks. It has successfully done so in December 2004 (Fig 3) and as a result its operations have expanded by 13%. GlaxoSmithKline, on the other hand, operating income expanded by only 3% despite the reduction of its operating leverage. This is owing to the fact that its revenue of $39 Billion only increased by 3%. Fig 4According to Fig 4, the Operating Income of GlaxoSmithKline has improved by an spare 4% where as PFIZER fell by 5%. PFIZER operating leverage has increased again and hence would account for the fall in Operating Income by $3 Billion. It was clear that GlaxoSmithKline managed its operating leverage bett er and hence reduces its risk.ConclusionThe question, which may arise, is whether PFIZER is in a better situation than GlaxoSmithKline The truth is leverage is neither good or bad(Schmedt May 1998). Each company must assess the amount of risk it is willing to take while striving to arrive at its corporate objectives. It is important to understand the companys cost structure to enable management to make effective decisions so that it can compete effectively and achieve the agonistic advantage it so desires.References Fred Schmedts, The concept of Operating Leverage The Samuel Roberts Noble Foundationhttp//www.noble.org/Ag/Economics/OperatingLeverage/index.htmlGlaxosmithkline PLC Financial Statements December 2003 to December 2005 - Yahoo Financehttp//finance.yahoo.com/q/iss=GSK& one-yearPFIZER Inc Financial Statements December 2003 to December 2005 - Yahoo Financehttp//finance.yahoo.com/q/iss=PFE&annualBuccino, Gerald P. and Kraig S. McKinley, The Importance of Operating Leverage in a Turnaround, Secure Lender (September / October 1997),