Asked by Yania Campbell on Apr 28, 2024
Verified
If the economy is shrinking, firms with high operating leverage will experience
A) larger decreases in profits than firms with low operating leverage.
B) similar decreases in profits as firms with low operating leverage.
C) smaller decreases in profits than firms with low operating leverage.
D) no change in profits.
Operating Leverage
The degree to which a firm or project can increase operating income by increasing revenue, reflecting fixed versus variable costs.
Profits
The financial gain realized when the revenues generated from business operations exceed the expenses, taxes, and costs incurred.
- Identify the effects of economic growth or recession on firms' profits based on their operating leverage.
Verified Answer
OL
Octavio LimpiasApr 28, 2024
Final Answer :
A
Explanation :
Firms with high operating leverage have higher fixed costs relative to variable costs, so when sales decrease, their profits decrease more significantly than those of firms with low operating leverage. This is because the high fixed costs remain constant even as revenue falls.
Learning Objectives
- Identify the effects of economic growth or recession on firms' profits based on their operating leverage.