If a change in sales results in a greater relative change in operating income (EBIT), we know that the firm has
A)a degree of operating leverage greater than one.
B)a degree of financial leverage greater than one.
C)a degree of operating leverage less than one.
D)a degree of financial leverage less than one.
E)none of the above.

Question

Quizplus · Accepted Answer

A greater relative change in operating income (EBIT) means that the firm has a higher degree of operating leverage. This is because operating leverage measures how sensitive a company's operating income is to changes in sales, and a higher degree of operating leverage indicates that a larger percentage change in sales results in an even larger percentage change in operating income. Therefore, choice A is the best answer.

If a Change in Sales Results in a Greater Relative