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How could an investment in the latest technology increase your fixed cost but bring down unit...

How could an investment in the latest technology increase your fixed cost but bring down unit cost? Elaborate, with an example/ scenario; real or fictional. What would operating leverage do to this scenario, if anything?

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Answer #1

The Investment in latest technology like purchase of automated machinery increases the machine cost like depreciation expenses, etc which is mainly classified as fixed cost of the business. Thus, the installation of types of machinery increases the fixed cost.

however, these latest technologies help in reducing the manual labor cost involved in the unit production. Thus able to reduce the labour cost of production which is directly involved and is classified as a variable cost. This reduces the unit variable cost.

Above such effect will help in reducing the total variable cost and thus increasing the contribution margin of the business. And the net income of the business might or might not changes as the fixed cost increases. This will help in improving the operating leverage of the business as the Total contribution margin (numerator) increases and the net income more or less remains same, as compared to previous situation.

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