Asked by Stuart Englehart on Jul 15, 2024
Verified
A company with high operating leverage will experience a larger reduction in net operating income in a period of declining sales than a company with low operating leverage.
Operating Leverage
A measure of how sensitive net operating income is to a given percentage change in dollar sales.
Net Operating Income
The income derived from a firm's core business operations, not including taxes and interest expenses.
- Acquire knowledge about the concept of operating leverage and its consequences on net operating income under diverse sales conditions.
Verified Answer
TL
Tiandra LivelyJul 17, 2024
Final Answer :
True
Explanation :
Operating leverage is the degree to which a company's operating costs are fixed rather than variable. A high operating leverage means that a larger portion of a company's costs are fixed, which can lead to higher profits in times of increased sales. However, in times of declining sales, the fixed costs remain the same, resulting in a larger reduction in net operating income compared to a company with low operating leverage.
Learning Objectives
- Acquire knowledge about the concept of operating leverage and its consequences on net operating income under diverse sales conditions.
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