Companies with low operating leverage will experience lower profits when sales increase than will companies with higher operating leverage.

Question

Quizplus · Accepted Answer

This is because companies with low operating leverage have lower fixed costs compared to their variable costs. Therefore, when sales increase, their variable costs will also increase proportionately, resulting in a lower net profit. On the other hand, companies with higher operating leverage have a greater proportion of fixed costs, which means that when sales increase, their profit margin will increase at a faster rate.

Companies with Low Operating Leverage Will Experience Lower Profits When