Final answer:
A project with a low degree of operating leverage has high variable costs relative to fixed costs, best described by option C. This means the company's costs increase with production, unlike companies with high operating leverage where the cost structure is more fixed and less sensitive to production levels.
Step-by-step explanation:
A project with a low degree of operating leverage is characterized by high variable costs relative to fixed costs. Operating leverage refers to the extent to which a company uses fixed costs to generate profits. With low operating leverage, a company has lower fixed costs and higher variable costs; this means that as sales increase, the additional cost of producing more goods or services also increases. The correct option that best describes a project with a low degree of operating leverage is C. high variable costs relative to the fixed costs.
For example, a leaf raking or snow shoveling business has low fixed costs (such as a car, rakes, and shovels) but may have high variable costs in the form of labor, which is paid per job. An internet company that has high fixed costs initially (such as website setup and information gathering) but low incremental costs for servicing more users has a high degree of operating leverage. Therefore, these two examples illustrate the difference between low and high operating leverage scenarios, respectfully.
Moreover, operating leverage impacts other financial aspects, such as forecasting risk, initial cash outlays, depreciation expenses, and sensitivity of operating cash flow (OCF) to sales quantity. However, these are not directly indicative of the degree of operating leverage as they do not pertain strictly to the cost structure in terms of fixed versus variable costs.