Operating leverage has to do with
A) borrowing money to finance a firm's growth.
B) using preferred stock to increase sales volume.
C) the incurrence of fixed operating costs in the firm's income stream.
D) financing with fixed cost sources of capital.

Question

Quizplus · Accepted Answer

Operating leverage refers to the degree to which a firm's operating income varies with changes in its level of output or sales revenue. It occurs when a firm has relatively high fixed operating costs and low variable costs. As sales volume increases, the fixed costs are spread over more units of output, resulting in higher profits. However, if sales decline, the fixed costs are still incurred, resulting in lower profits or even losses. Therefore, operating leverage has to do with the incurrence of fixed operating costs in the firm's income stream. The other choices are not related to operating leverage.

Operating Leverage Has to Do with