When a small change in sales results in a large change in operating income,one possible reason is that the firm is employing a relatively high degree of operating leverage.

Question

Quizplus · Accepted Answer

This statement is true. Operating leverage refers to the degree to which a firm uses fixed costs in its operations. When a firm has a high degree of operating leverage, a small change in sales can result in a large change in operating income because the fixed costs remain the same while the variable costs increase with higher sales. On the other hand, when a firm has a low degree of operating leverage, a change in sales will have a smaller effect on operating income because the variable costs will remain relatively constant.

When a Small Change in Sales Results in a Large