When management selects production technologies that include a high proportion of fixed costs,it:
A) decreases the DOL.
B) increases the DOL.
C) decreases the NPV-breakeven level of sales.
D) reduces the NPV of the cash flows.

Question

Quizplus · Accepted Answer

Production technologies with a high proportion of fixed costs increase the degree of operating leverage (DOL) because fixed costs are unaffected by changes in production or sales. This means that any increase in sales volume results in a proportionally greater increase in profits. Therefore, the higher the fixed costs, the higher the DOL.

When Management Selects Production Technologies That Include a High Proportion