Question

24. Risk is reduced when a high proportion of costs are fixed. True False

Answer 1

False is a correct answer

Costs have two types Variable cost and Fixed cost. Variable cost are directly related to the sales quantity which means when sales quantity increase it increases and it sales quantity reduced it also reduces but Fixed cost are not related to sale quantity which means change in sales quantity does not change the Fixed cost.

Now suppose, A company has variable cost as major portion of its total cost then if its Sales revenue reduced then its cost variable cost also reduces and resulting in reduction of overall losses.

However, If company has fixed cost as major portion of its total cost then instead fall in sales revenue Fixed cost remain same and it increase the overall loss of company.

Conclusion - A company has fixed cost as major portion of its costs then in case slow market means reduction in sales quantity company will make more loss then a company which has variable cost as major portion of its costs,