Which of the following statements is most likely true if Red Inc. has an operating leverage of 2.0 while Blue Corp. has an operating leverage of 1.4?

Question

Quizplus · Accepted Answer

Operating leverage measures a company's fixed costs as a percentage of its total costs. A higher operating leverage, like Red Inc.'s 2.0 compared to Blue Corp.'s 1.4, indicates that Red Inc. has a higher proportion of fixed costs relative to variable costs. This means that for Red Inc., a change in sales volume will have a greater impact on its net operating income due to its higher fixed costs. Therefore, statement C is most likely true, as it correctly infers that Blue Corp.'s fixed costs in relation to variable costs are lower than Red Inc.'s.

Which of the Following Statements Is Most Likely True If