When management selects production technologies that include a high proportion of fixed costs, they:
A)decrease their DOL.
B)increase their DOL.
C)decrease their NPV break-even level of sales.
D)reduce the NPV of their cash flows.

Question

Quizplus · Accepted Answer

When management selects production technologies that include a high proportion of fixed costs, they increase their degree of operating leverage (DOL). This means that any change in sales volume will have a greater impact on profits. As fixed costs cannot be easily adjusted in the short term, the company will have to produce enough products to cover its fixed costs before it can start earning profits. This increases the risk of losses when sales volumes are low, but also increases the potential for high profits when sales volumes are high.

When Management Selects Production Technologies That Include a High Proportion