Which of the following statements is true?
A)The higher the firm's leverage,the higher the degree of sensitivity of profits to cost changes.
B)The higher the firm's leverage,the lower the degree of sensitivity of profits to cost changes.
C)The higher the firm's leverage,the higher the degree of sensitivity of profits to volume changes.
D)The higher the firm's leverage,the lower the degree of sensitivity of profits to volume changes.

Question

Quizplus · Accepted Answer

The degree of sensitivity of profits to volume changes is measured by the operating leverage. Operating leverage denotes the extent to which fixed costs are used in a company's operations. Thus, a higher firm leverage indicates that fixed costs are used to a greater extent in the firm's operations. Since fixed costs increase the degree of operating leverage, a higher firm leverage can imply a higher degree of sensitivity of profits to volume changes. Therefore, statement C is true. The remaining statements are incorrect.

Which of the Following Statements Is True