Which of the following statements regarding a relatively high degree of operating leverage is correct?
A) Firms with a relatively low fixed cost structure will have a higher degree of operating leverage.
B) Firms with a higher degree of operating leverage will see a steeper increase in fixed costs as sales volume increases.
C) Firms with higher degrees of operating leverage are less risky and more likely to earn a profit than those with lower degrees of operating leverage.
D) Firms with a higher degree of operating leverage will see a steeper increase in operating profit as sales volume increases.

Question

Quizplus · Accepted Answer

The degree of operating leverage acts as a multiplier of sales revenues changes. As the degree of operating leverage increases, so does the multiplier effect. Therefore, firms with a higher degree operating leverage will see a steeper increase in operating profit as sales volume increases. Firms with higher degrees of operating leverage are riskier than firms with lower degrees of operating leverage, since greater levels of fixed costs must be offset by higher sales levels for firms with higher degrees of operating leverage.

Which of the Following Statements Regarding a Relatively High Degree