If company A has a higher degree of operating leverage than company B,then which of the following statements is true?
A) Company A has higher variable expenses.
B) Company A's profits are more sensitive to percentage changes in sales.
C) Company A is more profitable.
D) Company A is less risky.

Question

Quizplus · Accepted Answer

A higher degree of operating leverage means that a larger portion of the company's costs are fixed. This means that if sales increase, the company's profits will increase at a faster rate than if its costs were mostly variable. However, if sales decrease, the company's profits will decrease at a faster rate as well. Therefore, Company A's profits are more sensitive to percentage changes in sales.

If Company a Has a Higher Degree of Operating Leverage