Question

1.Operating leverage enables a company to convert small changes in fixed costs into dramatic changes in profitability. True False

2. If a company decreases its fixed costs and increases its variable costs, it will lower both the level of risk and its potential for profits. True False

3 If revenues are expected to decline, management should attempt to convert its fixed costs into variable costs. True False

Can you give an explanation, please ?

Answer 1

1. True

Operating leverage is the analysis of fixed costs and variable costs. A company which has high fixed cost is said to have have operating leverage. The degree of operating leverage reflects the cost structure of the company. Hence, a small change in the fixed costs will result in dramatic changes in profitability.

2. True

When a company decreases its fixed costs and increases its variable costs, it will lower the level of operating risk, and also decrease its potential for net profits. Lower fixed costs results in lower level of risk and also results in a decline in the potential for profits of the company. Risk and profits go hand in hand.

3. True

Conversion of fixed costs to variable costs is a major step in reducing the outflow and increasing the level of profitability. Hence, when sales are expected to decline, the management should convert all possible fixed costs into variable costs.