Question

Suppose a company with high operating leverage is also operating at near capacity for all its fixed-cost resources. How could an increase in sales volume result in decreasing economies of scale for this company?

Answer 1

Answer Explanation:

Operating leverage is the degree to which a firm is able to increase its income by increasing its revenue which is based on its fixed cost.

Economies of scales is the increase in output with the decrease in per unit cost.

In the question it states that a company has high operating leverage and operating at near capacity which means the company is using more fixed assets in comparison to its current assets. If the company uses more fixed assets which is by increasing sales volume then the economies of scales will be hindered because economies of scales is best utilized with fixed capital. Therefore, with the increase in sales volume the cost of per unit fixed assets will decrease, disturbing the economies of scales and resulting in decreasing economies of scale.