Suppose a Firm Increases Its Sales Using Existing Fixed Assets

question 26

Multiple Choice

Suppose a firm increases its sales using existing fixed assets. Everything else equal, what effect will the increase in sales have on the firm's degree of operating leverage (DOL) ?

• A)The DOL should increase.
• B)The DOL should decrease.
• C)The DOL should not change, because the amount of fixed asset does not change.
• D)The DOL should increase if fixed operating costs represent a significant proportion of total operating costs; otherwise, the DOL should decrease.
• E)Because the fixed operating costs are not know, the impact on DOL cannot be determined.

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Definitions:

Profit Maximization

The process by which a firm determines the price and output level that returns the greatest profit.

Input Increases

A scenario in production or economics where the quantity of resources used in the production process is increased, potentially affecting outputs.

Price of Output

The market price at which a product or service is sold, determined by various factors including production costs, supply and demand, and market competition.

Profit-maximizing Firm

A company operated with the primary goal of making the highest possible profit, typically by adjusting outputs, prices, or inputs.