Which of the following statements is true regarding operating leverage?
A)Companies with high operating leverage will earn lower profits than companies with low operating leverage.
B)Companies with high operating leverage will earn higher profits than companies with low operating leverage.
C)Companies with high operating leverage generally experience fewer profit fluctuations as sales fluctuate than do companies with low operating leverage.
D)Companies with high operating leverage generally experience larger operating profit fluctuations as sales fluctuate than do companies with low operating leverage
E)None of the answer choices is correct.

Question

Quizplus · Accepted Answer

Operating leverage refers to the extent to which fixed costs are utilized in a company's operations. Companies with high operating leverage have a high proportion of fixed costs in their cost structure, which means that a small change in sales volume can translate into larger percentage changes in operating profits. Therefore, companies with high operating leverage generally experience larger operating profit fluctuations as sales fluctuate than do companies with low operating leverage.

Which of the Following Statements Is True Regarding Operating Leverage