Question

Explain the following as factor affecting financing decision:

Fixed Operating Costs 

Answer 1

The financing decision is affected by fixed operating costs in a number of ways: 

1. Impact on Break-Even Point: A company's break-even point, or the sales volume at which total revenue equals total costs, is influenced by fixed operating costs. In order to cover its fixed costs and turn a profit, the corporation must boost sales volumes because increasing fixed costs raise the break-even point.
2. Risk Assessment: Regardless of business performance, fixed operating costs are a monetary commitment that needs to be fulfilled. Excessive fixed expenses raise the business's financial risk, particularly in times of weak sales or recessions.