When management selects production technologies that include a high proportion of fixed costs, they:
A)Decrease their DOL
B)Increase their DOL
C)Decrease their NPV break-even level of sales
D)Reduce the NPV of their cash flows

Question

Quizplus · Accepted Answer

When management selects production technologies that include a high proportion of fixed costs, they increase their degree of operating leverage (DOL). This means that a small change in sales volume can cause a significant change in operating income. While this can lead to higher profits in good times, it also increases the risk of losses in bad times. Therefore, companies must carefully consider the trade-off between risk and reward when choosing their production technologies.

When Management Selects Production Technologies That Include a High Proportion