All else equal, an increase in fixed operating expenses:
A) increases financial risk.
B) increases business risk.
C) decreases business risk.
D) decreases operating leverage.

Question

Quizplus · Accepted Answer

An increase in fixed operating expenses increases business risk because it raises the company's break-even point, making it more sensitive to changes in sales volume. Financial risk is related to the structure of a company's financing (debt vs. equity), not its operating expenses. Operating leverage increases with higher fixed costs, not decreases.

All Else Equal, an Increase in Fixed Operating Expenses