Which one of the following will best reduce the risk of a project by lowering the degree of operating leverage?
A) Hiring additional employees rather than using temporary outside contractors
B) Subcontracting portions of the project rather than purchasing new equipment to do all the work in-house
C) Buying equipment rather than leasing it short-term
D) Lowering the projected selling price per unit
E) Changing the proposed labor-intensive production method to a more capital intensive method

Question

Quizplus · Accepted Answer

Subcontracting portions of the project rather than purchasing new equipment to do all the work in-house can reduce the risk of a project by lowering the degree of operating leverage. This approach minimizes fixed costs (like the cost of purchasing new equipment) and increases variable costs, which can lead to a lower operating leverage. Lower operating leverage means that a company's earnings are less sensitive to changes in sales volume, reducing the risk associated with fixed cost investments.

Which One of the Following Will Best Reduce the Risk