Managerial Accounting: E4-1 John Diaz owns Pacific Electric, a large electrical contracting firm

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Managerial Accounting
Exercise 4-1. Operating Leverage
John Diaz owns Pacific Electric, a large electrical contracting firm that provides services to building construction projects. The company has 2,000 employees and operates in three western states. Recently the company experienced large losses due to a downturn in the economy and a slowdown in construction. John thinks the losses were particularly large because his company has too much fixed cost.

Required:
a. Expand on John's thought. How are the large losses related to fixed costs?
b. Identify a way that John can turn potential fixed costs into variable costs.
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