If company A has a higher degree of operating leverage than company B, then:

Question

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A higher degree of operating leverage means that a larger proportion of the company's total costs are fixed costs rather than variable costs. When sales increase, a larger portion of the revenue goes towards covering the fixed costs, resulting in a higher operating income. However, the opposite is also true- a decrease in sales will result in a larger portion of the revenue needing to cover the fixed costs, resulting in a greater decline in operating income. Therefore, Company A's profits are more sensitive to percentage changes in sales compared to Company B. This makes Company A riskier but potentially more profitable.

If Company a Has a Higher Degree of Operating Leverage