Operating Risk Relation to Fixed Operating Costs.

CFA Level I Corporate Finance
#1

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…???

#2

Your question needs to be moved/reposted to the L1 forum.

#3

Assuming all variable costs, to breakeven, you need not sell anything: Sale 0, NI 0, operating breakeven point 0. Add in even a tiny amount of fixed cost, and your operating breakeven point immediately increases to X, so now your probability to breakeven is Pr(Z>=X). Higher fixed cost => higher X => lower Pr(Z>=X) => higher probability that you will not breakeven => higher uncertainty of income and CF (in the sense of income and CF > 0).

TL, DR: go back to CFAI curriculum.

#4

Thank You…Appreciate your knowledge of the subject.