Answer C:
1. Operating leverage is the extent to which a firm’s operations employ fixed operating expenses. The greater the proportion of fixed expenses used to produce a product, the greater the degree of operating leverage. Thus, Candice’s capital intensive manufacturing method utilizes a greater degree of operating leverage.
The greater the degree of operating leverage, the greater the change in operating income (loss) relative to a small fluctuation in sales volume. Thus, there is a higher degree of variability in operating income if operating leverage is high. The greater the operating leverage and the resultant variability in operating income, the greater the degree of business risk.
2. Candice should employ the capital intensive manufacturing method if annual sales are expected to exceed 311,111 units and the labor intensive manufacturing method if annual sales are not expected to exceed 311,111 units.
Answer D:
Candice must consider the following business factors other than operating leverage before selecting a manufacturing method:
variability or uncertainty with respect to demand, both quantity and selling price.
the ability to produce and market the new product quickly.
the ability to discontinue the production and marketing of the new product while incurring the least amount of loss.
