If a firm does not meet its forecasted sales level, leverage will result in a magnified loss in income compared to what is expected. This will occur because production facilities might not be expanded appropriately.

Question

Quizplus · Accepted Answer

Leverage magnifies both gains and losses, but the statement incorrectly attributes the magnified loss to production facilities not being expanded, which is unrelated to leverage. Leverage affects financial outcomes through fixed costs, not production capacity.

If a Firm Does Not Meet Its Forecasted Sales Level