Asked by Bulut Yasin on May 05, 2024
Verified
If the economy is growing, firms with high operating leverage will experience
A) higher increases in profits than firms with low operating leverage.
B) similar increases in profits as firms with low operating leverage.
C) smaller increases in profits than firms with low operating leverage.
D) no change in profits.
E) None of the options are correct.
Operating Leverage
A measure of how revenue growth translates into growth in operating income, indicating the degree to which a company can increase its profits by increasing sales.
Profits
The financial gains that remain after subtracting all expenses from revenue, indicating the financial success of a business.
- Investigate how shifts in the economy, whether growth or recession, affect the profit levels of enterprises based on their operating leverage.
Verified Answer
CA
Cynthia ArreolaMay 11, 2024
Final Answer :
A
Explanation :
Firms with high operating leverage have a greater proportion of fixed costs in their total cost structure. When sales increase during economic growth, these firms experience a more significant increase in profits compared to firms with low operating leverage, due to the larger impact of fixed costs spreading over more units sold.
Learning Objectives
- Investigate how shifts in the economy, whether growth or recession, affect the profit levels of enterprises based on their operating leverage.
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