Compared to organizations with low operating leverage, organizations with high operating leverage have:
A) Higher risk of loss if they are close to the breakeven point
B) Lower risk of loss if they are close to the breakeven point
C) The same level of risk of loss as low operating leverage firms when they are close to the breakeven point
D) A low proportion of fixed costs in total cost

Question

Quizplus · Accepted Answer

Organizations with high operating leverage have a higher proportion of fixed costs in total cost, meaning that their costs are more inflexible and do not change much with changes in sales volume. As a result, when sales decline and they are close to the breakeven point, the organization will experience a large decline in profitability or even a loss. Therefore, they have a higher risk of loss if they are close to the breakeven point compared to low operating leverage organizations.

Compared to Organizations with Low Operating Leverage, Organizations with High