A firm with high operating leverage is expected to:
A)Have high variable costs
B)Have low fixed costs
C)Have a high degree of profitability
D)Perform better when sales are high

Question

Quizplus · Accepted Answer

A high operating leverage means that the fixed costs of the firm are high relative to its variable costs. This implies that the firm's profitability is highly dependent on its sales volume. When sales are high, the firm's operating income will increase significantly due to the high fixed costs. However, when sales are low, the firm's operating income will decrease significantly due to the same fixed costs. Therefore, a firm with high operating leverage performs better when sales are high.

A Firm with High Operating Leverage Is Expected To