What is characteristic of operating leverage?
A) It provides the same information as margin of safety.
B) It is concerned with the relative mix of contribution margin and margin of safety.
C) It is likely to be lower in an automated manufacturing system than in a manual system.
D) It uses fixed costs to extract higher percentage changes in profits as sales activity changes.

Question

Quizplus · Accepted Answer

Operating leverage refers to the use of fixed costs to extract higher percentage changes in profits as sales activity changes. It is a measure of how sensitive a company's operating income is to changes in revenue. A higher operating leverage indicates that a company's profits will be more sensitive to changes in sales revenue. Therefore, the correct choice is D. The other options are incorrect as they do not accurately describe the characteristic of operating leverage.

What Is Characteristic of Operating Leverage