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 economy and a subsequent decline in sales. John thinks the losses were particularly large because fixed costs are too high.

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.