Firms with a high degree of operating leverage are
A) easily capable of surviving large changes in sales volume.
B) usually trading off lower levels of risk for higher profits.
C) significantly affected by changes in interest rates.
D) trading off higher fixed costs for lower per-unit variable costs.

Question

Quizplus · Accepted Answer

Firms with a high degree of operating leverage have high fixed costs, which means they have a lower per-unit variable cost. This can lead to higher profits if sales volumes are high. However, if sales volumes decrease, the high fixed costs can lead to significant losses. Thus, firms with a high degree of operating leverage are usually trading off higher fixed costs for lower per-unit variable costs.

Firms with a High Degree of Operating Leverage Are