Firm A produces semiconductors using highly technical machinery; Firm B is a retail clothing store with little use of machinery. Consider which firm employs a higher degree of operating leverage and then answer the following question: "Which of the following comparative statements about firms A and B is true?"
A) A has a lower break-even point than B, but A's profit grows faster after the breakeven.
B) A has a higher break-even point than B, but A's profit grows slower after the breakeven.
C) B has a lower break-even point than A, but A's profit grows faster after the breakeven.
D) B has a lower break-even point than A, and profit grows at the same rate for both companies after the break-even point.

Question

Quizplus · Accepted Answer

Firm A, which uses highly technical machinery, has a higher degree of operating leverage due to its significant fixed costs. This results in a higher break-even point compared to Firm B, which has lower fixed costs. However, after reaching the break-even point, Firm A's profits grow faster due to the leverage effect, where a small increase in sales results in a larger increase in profits.

Firm a Produces Semiconductors Using Highly Technical Machinery; Firm B