A firm with high operating leverage is expected to:
A) have high variable costs.
B) have low fixed costs.
C) have a high degree of profitability.
D) perform particularly well when sales are high.

Question

Quizplus · Accepted Answer

A firm with high operating leverage has a large proportion of fixed costs in its cost structure, which means that its cost per unit decreases as production or sales increase. Therefore, when sales are high, the firm is able to generate more profit due to the lower cost per unit. However, when sales are low, the firm may face difficulties as it still has to bear the high fixed costs, leading to lower profitability.

A Firm with High Operating Leverage Is Expected To