Operating leverage refers tothe presence of _____ that do not change when the level of sales changes.
A) fixed-income securities
B) beta risks
C) firm-specific risks
D) variable costs
E) fixed costs

Question

Quizplus · Accepted Answer

Operating leverage refers to the presence of fixed costs that do not change when the level of sales changes. These fixed costs, such as rent, property taxes, and salaries, can magnify the impact of changes in sales on a company's profits. As sales increase, the contribution margin (the difference between sales revenue and variable costs) grows, and more of each sale contributes to covering the fixed costs. As a result, profits grow faster than sales. However, if sales decline, the fixed costs must still be covered, and profits can decline rapidly.

Operating Leverage Refers Tothe Presence of _____ That Do Not