Firms with high operating leverage tend to make more from increasing sales than similar firms with low operating leverage.

Question

Quizplus · Accepted Answer

Firms with high operating leverage have relatively high fixed costs and low variable costs. This means that as sales increase, the proportion of profits also increases, as more revenue goes towards covering fixed costs, which do not increase with higher sales. In contrast, firms with low operating leverage have relatively high variable costs and low fixed costs, so as sales increase, a larger proportion of revenue goes towards variable costs, decreasing the overall profit margin. Therefore, the statement is true.

Firms with High Operating Leverage Tend to Make More from Increasing