When a fixed cost is replaced with a variable cost, the firm's ____________ effectively decreases.
A) Operating leverage.
B) Forecasting risk.
C) Projected cash flow.
D) Sensitivity contribution.
E) Total variable cost.

Question

Quizplus · Accepted Answer

Operating leverage decreases when a fixed cost is replaced with a variable cost because operating leverage measures how revenue growth translates into growth in operating income, and is higher when fixed costs constitute a larger proportion of total costs.

When a Fixed Cost Is Replaced with a Variable Cost