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 measures the extent to which a firm uses fixed costs in its operations. By replacing a fixed cost with a variable cost, the firm's operating leverage decreases because it is using fewer fixed costs.

When a ﬁXed Cost Is Replaced with a Variable Cost