Question

Operating Leverage: John Diaz is the president of Pacific Refrigeration. The company has 2,000 employees and manufactures and sells a variety of refrigeration units for commercial use. Recently, the company experienced large losses due to a downturn in the econ- omy and a subsequent decline in sales. John thinks the losses were particularly large because his company has too many fixed costs.

b. Identify a way that John can turn potential fixed costs into variable costs.

Answer 1

John could turn potential fixed cost into variable cost by restructuring the salaries of his 2,000 employees. He could do this by coming up with incentive compensations (commissions) instead o salaries are lower with incentives in place it would cut down on pay during the downturn in the economy and slowdown in construction f paying high salaries. If the employees