Operating leverage is greater:
A)The greater the percentage of non-discretionary costs.
B)The lower the percentage of non-discretionary costs.
C)The greater the percentage of discretionary costs.
D)The lower the percentage of discretionary costs.
E)None of the above.

Question

Quizplus · Accepted Answer

Operating leverage is greater when the percentage of non-discretionary costs is higher. Non-discretionary costs are fixed costs that cannot be easily changed or avoided, such as rent, property taxes, and insurance. As a result, a business with a higher percentage of non-discretionary costs will have higher fixed costs and a lower variable cost component. This means that small changes in sales volume can have a significant impact on profit margins, making the business more sensitive to changes in revenue. This increased sensitivity to changes in revenue is what is referred to as operating leverage.

Operating Leverage Is Greater