If a large proportion of costs is fixed,a shortfall in sales has a magnified effect on profits.From the previous statement we know that the risk of a project is affected by the degree of operating leverage.

Question

Quizplus · Accepted Answer

The statement is true. The degree of operating leverage (DOL) measures how sensitive a company's operating income is to changes in revenue. When a large proportion of costs is fixed, a small change in sales can have a significant impact on profits, resulting in a high DOL and increased risk for the project.

If a Large Proportion of Costs Is Fixed,a Shortfall in Sales