Asked by Elizabeth Morrical on May 09, 2024
Verified
Companies with large amounts of fixed costs will generally have a high operating leverage.
Operating Leverage
A measure of how revenue growth translates into growth in operating income, influenced by the proportion of fixed to variable costs.
Fixed Costs
Fixed Costs are business expenses that remain constant regardless of the level of production or sales activity, such as rent, salaries, and insurance.
- Comprehend the principle of operating leverage and its consequences on business risk and profitability.
Verified Answer
MN
Michael Nguyen, M.D.May 11, 2024
Final Answer :
True
Explanation :
A high operating leverage occurs when a company has high fixed costs and low variable costs. This means that a small increase in sales can lead to a large increase in profits. Conversely, a small decrease in sales can lead to a large decrease in profits. Therefore, companies with large amounts of fixed costs will generally have a high operating leverage.
Learning Objectives
- Comprehend the principle of operating leverage and its consequences on business risk and profitability.