Operating Risk Relation to Fixed Operating Costs.

I am not able to understand this line :

Operating risk is affected by the relative mix of fixed and variable operating costs : the greater the fixed operating costs, relative to variable operating costs, greater the uncertainty of income and cash flows from operations and greater the operating Risk…WHY is uncertainty of income and cash flows increasing with increase in fixed operating cost and not variable operating costs…???

If you forecast that the sale will decrease, there are two things you have to be concern.

First is fixed operating cost because you cannot reduce it.

Second is interest that you have to pay to lender.

However, if your sale will increase, these two will make you a lot of profit.

It is called ‘Operating Leverage’.

Here is the more explanation about it http://campus.murraystate.edu/academic/faculty/lguin/FIN330/OperLeverage.htm

Fixed costs can break the bank.

variable cost: “bad quarter? Just pay costs associated with your level of sales”

Fixed cost: “bad quarter? Not enough cash flow to cover fixed costs? Eff you, pay me!”