If the economy is shrinking, firms with low operating leverage will experience
A) larger decreases in profits than firms with high operating leverage.
B) similar decreases in profits as firms with high operating leverage.
C) smaller decreases in profits than firms with high operating leverage.
D) no change in profits.

Question

Quizplus · Accepted Answer

Firms with low operating leverage have a higher proportion of variable costs relative to fixed costs. This means that when sales decrease, these firms can adjust their costs more easily, leading to smaller decreases in profits compared to firms with high operating leverage, which have higher fixed costs and less flexibility to adjust expenses.

If the Economy Is Shrinking, Firms with Low Operating Leverage