Which company is likely to have high operating leverage?
A) A company with high fixed costs.
B) A company with high variable costs.
C) A company with low fixed costs.
D) A company financed largely by debt

Question

Quizplus · Accepted Answer

Operating leverage is the degree to which a company uses fixed costs in its operations. A high operating leverage means that a large portion of the company's costs is fixed, which can amplify the impact of changes in sales on the company's profits. Therefore, a company with high fixed costs is likely to have high operating leverage. Choice B) is incorrect because variable costs do not contribute to operating leverage. Choice C) is incorrect because a low proportion of fixed costs means the company has low operating leverage. Choice D) is incorrect because the company's financing structure does not necessarily influence operating leverage.

Which Company Is Likely to Have High Operating Leverage