Asked by Michael Sefick on Jul 16, 2024
Verified
Which one of the following could lower the risk of a project by lowering the degree of operating leverage?
A) You could hire temporary workers from an employment agency rather than hiring part-time employees.
B) You could use sub-contractors to produce sub-assemblies of your product rather than purchasing new equipment to do the work in-house.
C) You could lease equipment on a long-term basis rather than buying the equipment.
D) You could lower the projected selling price per unit.
E) You could change the production method to one which relies more on fixed costs and less on variable costs than the current proposed method of production.
Operating Leverage
Operating leverage is a measure of how revenue growth translates into growth in operating income, indicating the degree to which a firm can increase operating income by increasing revenue.
Degree of Operating Leverage
A financial ratio that measures how a change in sales volume will affect a company's operating income due to fixed and variable costs.
Temporary Workers
Employees hired for a specific period or to complete a specific task, often without the promise of long-term employment.
- Understand the concept of operating leverage and how it affects project risk.
Verified Answer
ZL
Zin Lwin ThantJul 18, 2024
Final Answer :
B
Explanation :
Using sub-contractors to produce sub-assemblies instead of purchasing new equipment to do the work in-house can lower the risk of a project by reducing the degree of operating leverage. This approach shifts some fixed costs to variable costs, as payments to sub-contractors are typically variable costs that vary with the level of production, unlike the fixed costs associated with owning equipment.
Learning Objectives
- Understand the concept of operating leverage and how it affects project risk.