Which of the following statements regarding a relatively high degree of operating leverage (DOL) is correct?
A) Firms with a relatively low proportion of variable costs will have a higher degree of operating leverage.
B) Firms with higher degrees of operating leverage will see a lower increase in operating income as sales volume increases.
C) Firms with higher degrees of operating leverage are less risky and more likely to earn a profit than those with lower degrees of operating leverage.
D) Firms with higher degrees of operating leverage are riskier than those with lower degrees of operating leverage, since there are more fixed costs to overcome.

Question

Quizplus · Accepted Answer

The degree of operating leverage acts as a multiplier of sales revenues changes. As the degree of operating leverage increases, so does the Multiplier effect. Therefore, firms with higher operating leverage will see a steeper increase in operating profit as sales volume increases. Firms with Higher degrees of operating leverage are riskier than firms with lower DOLs because higher levels of fixed costs must be offset by higher sales and Contribution margins.

Which of the Following Statements Regarding a Relatively High Degree