Final answer:
A very high degree of operating leverage signifies that a firm has high fixed costs. Operating near or below the break-even point, a company must decide whether to continue operations or shut down based on which option leads to minimal losses. Option a
Step-by-step explanation:
A very high degree of operating leverage indicates that a firm has high fixed costs. This means that a substantial portion of the company's total costs are fixed, and these costs do not change with the level of output in the short term.
Businesses with high operating leverage benefit more from each additional unit of sale after covering their initial fixed costs, since their variable costs are relatively low. Therefore, a sharp increase in sales significantly impacts net income.
Figure 8.6 demonstrates that if the price a company charges for its product is less than the average total cost, but more than the average variable cost, the company should continue to operate if the losses from shutting down would be greater.
This scenario often arises when a company operates near or below the break-even point. The break-even point is the level of output at which total revenues are equal to total costs, meaning the firm is not making a profit, but not losing money either.
The concept of fixed and variable costs is critical for a firm to understand its cost structure and determine its long-term production and profit strategies. The right choice between continuing production or shutting down depends on which option results in the least amount of money lost. Option a