Which of the following statements is true?
A) The degree of pretax cash flow operating leverage remains same for any level of revenue.
B) The higher the proportion of fixed costs to variable costs in a project, the greater the sensitivity of pre-tax operating cash flows to changes in revenue.
C) Depreciation and amortization are deducted to get pretax operating cash flows.
D) The lower the proportion of fixed costs to variable costs in a project, the more pre-tax operating cash flows will vary as revenue varies.

Question

Quizplus · Accepted Answer

The statement "The higher the proportion of fixed costs to variable costs in a project, the greater the sensitivity of pre-tax operating cash flows to changes in revenue" is true. This is because fixed costs remain constant and do not change with changes in revenue, while variable costs increase or decrease with changes in revenue. Therefore, projects with higher fixed costs will have a greater impact on pre-tax operating cash flows with changes in revenue. The other statements are false. The degree of pretax cash flow operating leverage changes with the level of revenue, depreciation and amortization are added back to get pretax operating cash flows, and the higher proportion of fixed costs leads to more variation in pre-tax operating cash flows.

Which of the Following Statements Is True