Operating leverage exists when:
A) a company utilizes debt to finance its assets.
B) management buys enough of the company's shares of stock to take control of the corporation.
C) the organization makes purchases on credit instead of paying cash.
D) small percentage changes in revenue produce large percentage changes in profit.

Question

Quizplus · Accepted Answer

Operating leverage refers to the degree to which a company's fixed costs are used in its operations. When a company has high fixed costs relative to its variable costs, small changes in revenue can have a magnified effect on profit. This is because the company's fixed costs are spread over a smaller revenue base, resulting in higher profit margins. Therefore, option D is the correct choice as it accurately describes operating leverage.

Operating Leverage Exists When