Firm A employs a high degree of operating leverage; Firm B takes a more conservative approach. Which of the following comparative statements about firms A and B is true?
A) Firm A has a lower break-even point than Firm B, but Firm A's profit grows faster after the breakeven.
B) Firm A has a higher break-even point than Firm B, but Firm A's profit grows slower after the breakeven.
C) Firm B has a lower break-even point than Firm A, but Firm A's profit grows faster after the breakeven.
D) Firm B has a lower break-even point than Firm A, and profit grows the same rate for both companies after the break-even point

Question

Quizplus · Accepted Answer

Firm A's high degree of operating leverage indicates that it has a higher proportion of fixed costs in its cost structure compared to variable costs. Because of this, Firm A will have a higher break-even point than Firm B, which takes a more conservative approach with a lower degree of operating leverage. However, Firm A's profit will grow faster once the breakeven point is reached compared to Firm B. This is because once sales exceed the breakeven point, the fixed costs remain the same while the variable costs decrease, resulting in a higher contribution margin and greater profit for Firm A. Therefore, option C is the correct answer.

Firm a Employs a High Degree of Operating Leverage; Firm