Which of the following statements is most correct?
A) Higher levels of fixed costs result in lower levels of operating leverage.
B) Higher variable costs result in larger contribution margin.
C) Higher fixed costs result in larger break-even quantity.
D) Higher leverage results in lower interest costs.

Question

Quizplus · Accepted Answer

Higher fixed costs result in larger break-even quantity because there is a larger amount of revenue needed to cover those costs before a company can start earning a profit. On the other hand, higher levels of operating leverage result in higher fixed costs and lower variable costs, which means that a company's profitability is more sensitive to changes in sales. Option A is incorrect because higher fixed costs result in higher operating leverage. Option B is incorrect because higher variable costs result in a lower contribution margin. Option D is incorrect because higher leverage generally results in higher interest costs.

Which of the Following Statements Is Most Correct