Which one of the following statements is true concerning operating leverage?
A) The higher the degree of operating leverage, the greater the impact of forecasting risk.
B) Firms with low operating leverage are said to be capital intensive.
C) The degree of operating leverage is equal to [1 + (OCF/FC)].
D) The degree of operating leverage is equal to the percent change in quantity divided by the percent change in operating cash flow.
E) Operating leverage increases as the output quantity rises.

Question

Quizplus · Accepted Answer

Operating leverage measures how revenue growth translates into growth in operating income. A higher degree of operating leverage indicates that a small change in sales can lead to a large change in operating income, thus increasing forecasting risk because small errors in sales forecasts can lead to large deviations in expected operating income.

Which One of the Following Statements Is True Concerning Operating