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 the degree to which a firm uses fixed costs in its operations. The higher the degree of operating leverage, the more sensitive a firm's operating income is to changes in sales. This means that forecasting risk (the risk of inaccurate sales forecasts) is greater for firms with high operating leverage.

Which One of the Following Statements Is True Concerning Operating