Business Risk

Evidence that a firm has high business risk would be provided by its volatile: A) fixed costs. B) operating profit. C) profit after taxes. D) sales.

D, not sure though

B for me. Volatile operating costs suggests the costs of doing business cannot be controlled->high business risk. Fixed Costs cannot be volatile, how often do fixed costs fluctuate? profit after taxes would need to be adjusted to rid the tax affects for better analysis of firm profits (in order to be sure the volatility is not due to changing tax rate) sales can be affected by market conditions, other factors not specific to the firm

If sales deteriorate, then the operating profit (Revenue of the business and the related costs and expenses EXCLUDING income derived from other sources than regular activities) deteriorates. Hence, my answer was sales.

true, sales affect operating profits, but if a firm can’t manage it’s (operating) costs effectively, i’d assume it would be a risky one.

Answer is B. Good explanation chad.

typically, business risk refers to volatility of operating profits. This can come from volatility in either its revenue stream or its costs. So, while “D” is partly correct, “B” is completely correct. As for volatility of after-tax profit, that can be higher either because of higher business risk or because of higher leverage (think “Dupont” analysis).