The Higher the Financial Breakeven Point and the Steeper the Slope

question 193

True/False

The higher the financial breakeven point and the steeper the slope of the capital structure line, the greater the financial risk.

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Definitions:

Variable Expenses

Costs that vary in direct proportion to changes in the level of activity or volume of production.

Fixed Expenses

Obligations that remain constant in total regardless of changes in business activity levels, such as lease payments and salaries.

Cost Formula Equation

An equation that determines the total cost based on fixed costs, variable rate per unit of activity, and the level of activity.

High-low Method

A technique used in cost accounting to estimate fixed and variable costs based on the highest and lowest levels of activity.