A firm with high operating leverage is characterized by __________ while one with high financial leverage is characterized by __________.
A)low fixed cost of production; low fixed financial costs
B)high variable cost of production; high variable financial costs
C)high fixed costs of production; high fixed financial costs
D)low costs of production; high fixed financial costs
E)high fixed costs of production; low variable financial costs

Question

Quizplus · Accepted Answer

Operating leverage refers to the extent to which fixed costs are used in production, while financial leverage refers to the extent to which debt or other fixed-cost financing is used to fund operations. Therefore, a firm with high operating leverage has high fixed costs of production, and a firm with high financial leverage has high fixed financial costs. Choice C reflects both of these characteristics.

A Firm with High Operating Leverage Is Characterized by __________