Suppose a firm increases the operating leverage used to produce a given quantity of output.What will this normally lead to?
A)a decrease in the standard deviation of its expected EBIT
B)a decrease in its business risk
C)a decrease in the variability of its expected EPS
D)a reduction in its fixed assets turnover ratio

Question

Quizplus · Accepted Answer

Increasing operating leverage typically involves increasing fixed costs relative to variable costs. This does not decrease the standard deviation of expected EBIT, decrease business risk, or decrease the variability of expected EPS. Instead, it often leads to a reduction in the fixed assets turnover ratio because the firm is utilizing more fixed assets (increasing fixed costs) relative to its sales.

Suppose a Firm Increases the Operating Leverage Used to Produce