When fixed expenses increase relative to sales, it indicates that there is not enough productive capacity to absorb an increase in sales.

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Fixed expenses are those that do not change regardless of the level of production or sales. If fixed expenses increase relative to sales, it suggests that the business is reaching its capacity limit and would need to increase its productive capacity to handle more sales effectively. Otherwise, the business may experience declining profits and lower overall efficiency.

When Fixed Expenses Increase Relative to Sales, It Indicates That