What happens to a firm with high operating leverage when the overall level of sales is very high?
A)The firm has higher levels of fixed costs
B)The firm will enjoy high profits
C)The firm will not break even in accounting terms
D)The firm will have a reduced level of fixed costs

Question

Quizplus · Accepted Answer

A firm with high operating leverage has a higher proportion of fixed costs compared to variable costs. When the overall level of sales is very high, the firm will experience a higher contribution margin (difference between sales revenue and variable costs), which leads to higher profits due to the leverage effect. This is because the fixed costs are spread over a larger sales volume, resulting in a lower per-unit cost and higher profits.

What Happens to a Firm with High Operating Leverage When