Asked by Jonathan Ghansiam on Jun 29, 2024
Verified
When a firm has a high degree of operating leverage:
A) Its projected cash flows are known with great certainty.
B) It is highly susceptible to damage created by forecasting errors.
C) Its cash flows remain relatively constant regardless of its sales level.
D) It will have a relatively low level of fixed assets.
E) It will low fixed costs and high variable costs.
Operating Leverage
A measure of how revenue growth translates into growth in operating income, indicating the degree to which a company can increase profits by increasing sales.
Forecasting Errors
Discrepancies between predicted values and the actual outcomes that were not anticipated in statistical forecasts.
- Acquire knowledge on the pivotal significance of operational leverage and its influence.
Verified Answer
ZK
Zybrea KnightJul 03, 2024
Final Answer :
B
Explanation :
A high degree of operating leverage means that a firm has a significant proportion of fixed costs in its cost structure, making its earnings more sensitive to changes in sales volume. Therefore, forecasting errors can have a substantial impact on its profitability.
Learning Objectives
- Acquire knowledge on the pivotal significance of operational leverage and its influence.