Increased operating leverage is associated with additional risk because
1) Lower variable costs increase the variability of total costs
2) Lower variable costs increase the variability of earnings before interest and taxes
3) Higher fixed costs increase the variability of earnings before interest and taxes
4) Higher fixed costs require higher sales to cover total costs.
A)1 and 3
B)1 and 4
C)2 and 3
D)3 and 4

Question

Increased operating leverage is associated with additional risk because​
1) Lower variable costs increase the variability of total costs
2) Lower variable costs increase the variability of earnings before interest and taxes
3) Higher fixed costs increase the variability of earnings before interest and taxes
4) Higher fixed costs require higher sales to cover total costs.
A)​1 and 3
B)​1 and 4
C)​2 and 3
D)​3 and 4

Quizplus · Accepted Answer

Higher fixed costs increase the variability of earnings before interest and taxes because fixed costs remain constant regardless of sales volume, making earnings more sensitive to changes in sales. Additionally, higher fixed costs require higher sales to cover total costs, adding financial risk if sales do not meet expectations.

Increased Operating Leverage Is Associated with Additional Risk Because​

Increased Operating Leverage Is Associated with Additional Risk Because