Questions:
1. Define fixed cost and variable cost and give an example of each.
2. How can knowing cost behavior relative to volume fluctuations affect decision making?
3. Define the term operating leverage and explain how it affects profits.
4. How is operating leverage calculated?
5. Explain the limitations of using operating leverage to predict profitability.
6. If volume is increasing, would a company benefit more from a pure variable or a pure fixed cost structure? Which cost structure would be advantageous if volume is decreasing?