Asked by Natalee Hines on May 12, 2024
Verified
If the economy is shrinking, firms with low operating leverage will experience
A) larger decreases in profits than firms with high operating leverage.
B) similar decreases in profits as firms with high operating leverage.
C) smaller decreases in profits than firms with high operating leverage.
D) no change in profits.
Operating Leverage
A measure of how sensitive a company's operating income is to a change in revenues, highlighting the impact of fixed versus variable costs.
Profits
The financial gain achieved when the revenue generated from a business activity exceeds the expenses, costs, and taxes needed to sustain the activity.
- Evaluate the influence of economic development or decline on the earnings of organizations, taking into account their operational leverage.
Verified Answer
DN
Dayang NurzawanieMay 13, 2024
Final Answer :
C
Explanation :
Firms with low operating leverage have a higher proportion of variable costs relative to fixed costs. This means that when sales decrease, these firms can adjust their costs more easily, leading to smaller decreases in profits compared to firms with high operating leverage, which have higher fixed costs and less flexibility to adjust expenses.
Learning Objectives
- Evaluate the influence of economic development or decline on the earnings of organizations, taking into account their operational leverage.