Final answer:
Decisions about using fixed or variable costs to run a business have an important impact on a company's operating leverage. These decisions shape the firm's financial stability and growth potential by affecting potential profit margins and financial risk.
Option 'C' is the correct.
Step-by-step explanation:
Decisions about whether to use fixed or variable costs to run a business impact a company's operating leverage. Fixed costs, which are incurred before any production begins, are known as sunk costs and do not change with the level of production, while variable costs change with the level of output.
In the short run, businesses look into their cost structures by analyzing fixed and variable costs to help in pricing decisions and understanding the profit-maximizing quantity to produce. In the long run, they combine these cost perspectives with sales and revenue analysis, influenced by market structure, to strategize for profit maximization.
From a long-run perspective, a firm analyzes its cost structure to make informed decisions on production quantities and pricing. Fixed costs become irrelevant in future economic decisions as they are sunk costs.
However, understanding the balance of fixed and variable costs is crucial, as it affects the firm's operating leverage. High fixed costs relative to variable costs give a company higher operating leverage, which means the firm could have higher potential profit margins but also increased financial risk. Conversely, a strategy that employs more variable costs can result in lower financial risk but also lower profit margins during high sales periods. The chosen mix directly affects the company's financial stability and growth potential.