In general, when fixed operating costs become a larger percentage of a company's operating costs, the operating leverage effect
A) Decreases
B) Stays the same
C) Increases

Question

Quizplus · Accepted Answer

The operating leverage effect is the extent to which fixed costs are present in a company's cost structure. When fixed operating costs become a larger percentage of a company's operating costs, the operating leverage effect increases. This means that a small change in revenue can result in a larger change in profits. This effect can work in a company's favor when sales are increasing, but can also be a risk if sales decrease.

In General, When Fixed Operating Costs Become a Larger Percentage