If a firm's sales decrease by 15% and profits decrease by 20% during a recession,the firms operating leverage is ____________?

Question

Quizplus · Accepted Answer

Operating leverage is the degree to which a company's costs are fixed, meaning they do not vary with changes in sales. It is measured as the percentage change in operating profit divided by the percentage change in sales.

Using the formula, we have:
Operating Leverage = Percentage change in operating profit / Percentage change in sales

In this case, the sales decreased by 15% and profits decreased by 20%.

Operating Leverage = -20 / -15 
Operating Leverage = 1.33

Therefore, the answer is A) 1.33.

If a Firm's Sales Decrease by 15% and Profits Decrease