If a firm is about to operate in an environment in which there will be a great deal of variability in the level of revenues, then the firm:
A) should structure its cost structure to have high fixed costs and higher total variable costs.
B) should structure its cost structure to have high fixed costs and consequently lower per unit variable costs.
C) should structure its cost structure to have low fixed costs and consequently higher per unit variable costs.
D) should leave the cost structure unchanged.

Question

Quizplus · Accepted Answer

When there is a great deal of variability in the level of revenues, it is best to have a cost structure that is flexible and can adjust to changes in revenue. This is achieved by having a low level of fixed costs and a higher level of variable costs. A low level of fixed costs means that the firm can easily adjust its cost structure to changes in revenue, while a higher level of variable costs means that the firm's total costs will increase as revenue increases, ensuring that it remains profitable. Hence, Option C is the best choice.

If a Firm Is About to Operate in an Environment