Which of the following is the best definition of operating leverage?
A) The effect that volatility has on a company's sales.
B) The risk of incorporating fixed income expense.
C) The uncertainty that a company has with regard to its operating income.
D) The tendency of fixed expenses to magnify risk.

Question

Quizplus · Accepted Answer

Operating leverage refers to the extent to which a company uses fixed costs in its cost structure. High operating leverage means that a company has a higher proportion of fixed costs relative to its variable costs, which magnifies the effect of changes in sales volume on its operating income. This is because, with high fixed costs, any increase in sales revenue will lead to a larger proportionate increase in operating income, and vice versa, hence magnifying risk.

Which of the Following Is the Best Definition of Operating