Question

1. The Degree of Operating Leverage Formula is only useful beyond the break even point of production.
   True
   False

Answer 1

Answer: False

The operating leverage formula is used to calculate a company’s break-even point and help set appropriate selling prices to cover all costs and generate a profit.

KEY POINT

• Operating leverage is a measure of how much debt a company uses to finance its ongoing operations.
• Companies with high operating leverage must cover a larger amount of fixed costs each month regardless of whether they sell any units of product.
• Low-operating-leverage companies may have high costs that vary directly with their sales but have lower fixed costs to cover each month.