When a firm has a high degree of operating leverage:
A) Its projected cash flows are known with great certainty.
B) It is highly susceptible to damage created by forecasting errors.
C) Its cash flows remain relatively constant regardless of its sales level.
D) It will have a relatively low level of fixed assets.
E) It will low fixed costs and high variable costs.

Question

Quizplus · Accepted Answer

A high degree of operating leverage means that a firm has a significant proportion of fixed costs in its cost structure, making its earnings more sensitive to changes in sales volume. Therefore, forecasting errors can have a substantial impact on its profitability.

When a Firm Has a High Degree of Operating Leverage