Other factors being constant, higher fixed operating costs mean:
A) higher financial leverage
B) higher operating leverage
C) lower combined leverage
D) the degree of financial leverage is equal to 1.0

Question

Quizplus · Accepted Answer

Higher fixed operating costs lead to higher operating leverage, which is a measure of how sensitive a company's operating income is to changes in revenue. This is because a higher proportion of costs are fixed, so any changes in revenue will have a greater impact on operating income. A higher operating leverage can be advantageous in times of growth, as it allows for higher profits, but can also be risky during economic downturns or declines in revenue. Financial leverage, on the other hand, relates to a company's use of debt financing and is not directly impacted by fixed operating costs. Combined leverage is the product of operating and financial leverage, so higher fixed operating costs would lead to a higher combined leverage only if a company also increases its debt financing. The degree of financial leverage would depend on the level of debt financing and the cost of that debt.

Other Factors Being Constant, Higher Fixed Operating Costs Mean