If a firm that has fixed costs in its operations does not meet its forecasted sales level, its operating leverage will result in a magnified decrease in net income compared to what is expected.

Question

Quizplus · Accepted Answer

This statement is true. Operating leverage refers to the ratio of fixed costs to variable costs in a company. If a company has high fixed costs and low variable costs, then a decrease in sales will have a magnified effect on net income because the fixed costs still need to be paid even if the sales are not meeting expectations. This means that a company with high operating leverage is more sensitive to changes in sales volume.

If a Firm That Has Fixed Costs in Its Operations