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Operating Leverage: John Diaz is the president of Pacific Refrigeration. The company has 2,000 employees and...

Operating Leverage: John Diaz is the president of Pacific Refrigeration. The company has 2,000 employees and manufactures and sells a variety of refrigeration units for commercial use. Recently, the company experienced large losses due to a downturn in the econ- omy and a subsequent decline in sales. John thinks the losses were particularly large because his company has too many fixed costs.

a. Expand on John’s thought. How are the large losses related to fixed costs?

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John thinks the company incurred losses because they had too much fixed cost. Firms that have high operating leverage are generally thought to be more risky because they tend to have large fluctuations in profit when sales fluctuate. 2013) It looks like sales havent met what they have expected resulting in a big loss. Company has fixed cost (rent and salaries) spread across buildings in three different states that he will have to look at closely

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