If a company has very low operating leverage (i.e.,a low proportion of fixed costs in the cost structure)and no changes are expected in operations:
A) percentage change income statement percentages can serve as the basis for projecting operating expenses.
B) using common-size income statement percentages will overstate future projected operating expenses.
C) using common-size income statement percentages will understate future projected operating expenses.
D) using common-size income statement percentages can serve as a reasonable basis for projecting future operating expenses.

Question

Quizplus · Accepted Answer

With very low operating leverage and no expected changes in operations, the proportion of fixed costs in the cost structure is low. Therefore, using common-size income statement percentages can serve as a reasonable basis for projecting future operating expenses. This is because as there are fewer fixed costs, changes in revenue will not have a significant impact on operating expenses. Thus, common-size income statement percentages can be used as a good approximation for projecting future operating expenses.

If a Company Has Very Low Operating Leverage (I