When a ﬁrm has a high degree of operating leverage:
A) Its projected cash ﬂows are known with great certainty.
B) It is highly susceptible to damage created by forecasting errors.
C) Its cash ﬂows remain relatively constant regardless of its sales level.
D) It will have a relatively low level of ﬁxed assets.
E) It will low ﬁxed costs and high variable costs.

Question

Quizplus · Accepted Answer

High degree of operating leverage means high fixed costs and low variable costs. This makes the firm highly susceptible to damage created by forecasting errors as small deviations in sales forecast can lead to significant deviations in profits.

When a ﬁRm Has a High Degree of Operating Leverage