Forde Co. has an operating leverage of 4. Sales are expected to increase by 12% next year. Operating income is
A) unaffected
B) expected to increase by 3%
C) expected to increase by 48%
D) expected to increase by 4%

Question

Quizplus · Accepted Answer

Operating leverage measures the sensitivity of a company's operating income to changes in sales. A higher operating leverage means that the company's operating income will change proportionately more in response to changes in sales.

If Forde Co. has an operating leverage of 4 and sales increase by 12%, then their operating income is expected to increase by 4 x 12% = 48%. Therefore, the correct choice is (C).

Forde Co Has an Operating Leverage of 4