If the economy is growing, firms with low operating leverage will experience
A) higher increases in profits than firms with high operating leverage.
B) similar increases in profits as firms with high operating leverage.
C) smaller increases in profits than firms with high operating leverage.
D) no change in profits.

Question

Quizplus · Accepted Answer

Firms with high operating leverage have a greater proportion of fixed costs in their cost structure, meaning that as sales increase, a larger portion of each additional dollar of sales contributes to profits after covering fixed costs. Therefore, in a growing economy, these firms typically experience larger increases in profits compared to firms with low operating leverage, which have a higher proportion of variable costs that rise with sales.

If the Economy Is Growing, Firms with Low Operating Leverage