What happens to a firm with high operating leverage when the overall level of sales is very high?
A) The firm is likely to have higher levels of fixed costs.
B) The firm is likely to enjoy high profits.
C) The firm will not break even in accounting terms.
D) The firm will have a reduced level of depreciation.

Question

Quizplus · Accepted Answer

A firm with high operating leverage has a high proportion of fixed costs relative to variable costs. When the overall level of sales is very high, this means that the firm is selling a greater quantity of goods or services, which can help spread out the fixed costs over a larger revenue base. This allows the firm to enjoy higher profits since the fixed costs are being spread over a larger number of units sold.

What Happens to a Firm with High Operating Leverage When