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    Question

    Operating risk is most likely to increase as a result of _______

    A An increase in sale risk Correct Answer Incorrect Answer
    B Increase in the variability of cost Correct Answer Incorrect Answer
    C An increase in fixed production cost Correct Answer Incorrect Answer
    D An increase in the total cost Correct Answer Incorrect Answer
    E None of the above Correct Answer Incorrect Answer

    Solution

    Operating risk is related to a company's cost structure and level of fixed costs in operations. It refers to the uncertainty about operating earnings arising from fixed (operating) costs. The higher the level of fixed costs in a company’s operations, the higher the operating risk, as it is more difficult for a company to adjust its costs according to the variation in sales. Operating risk is one of the two business risks, the other being sales risk (i.e. uncertainty of generating sales due to the variability in the price and volume of goods sold)

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