If a large proportion of a firm's costs is fixed,a shortfall in sales will have a magnified effect on the firm's profits.

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When a large proportion of a firm's costs is fixed, it means that these costs do not vary with changes in sales volume. Therefore, if sales fall short, total costs remain the same but the firm's revenue decreases leading to a magnified effect on the firm's profits. In other words, a small decrease in sales can cause a much larger decrease in profits when a significant portion of costs are fixed, leading to a higher sensitivity to changes in sales volume.

If a Large Proportion of a Firm's Costs Is Fixed,a