In general, when fixed operating costs become a smaller percentage of a company's operating costs, the operating leverage effect
A) Decreases
B) Stays the same
C) Increases

Question

Quizplus · Accepted Answer

The operating leverage effect refers to the impact of fixed costs on a company's profitability. When fixed costs become a smaller percentage of a company's operating costs, the company becomes less sensitive to changes in sales volume, and therefore, the operating leverage effect decreases. This is because a smaller proportion of costs are fixed and will not change with changes in sales volume, meaning there is less potential for profit to increase rapidly with increased sales.

In General, When Fixed Operating Costs Become a Smaller Percentage