Question

Firms with high operating leverage tend to have:

Multiple Choice

• High asset turnover and high return on sales.

• Low asset turnover and low return on sales.

• Low asset turnover and high return on sales.

• High asset turnover and low return on sales.

• Decreased levels of short-term fixed costs.

Answer 1

Operating leverage = Contribution Margin / Profit

Asset Turnover = Sales / Fixed Assets

Return on Sales = EBIT or Net Profit / Sales

Concidering the above equations we can conclude that

1. Operating leverage will be higher with higher fixed costs.

2. Fixed costs will be higher will higher fixed assets, as depreciation will be higher.

3. Return on sales will be lower if operating everage is higher.

Therefore, the correct answer is "low asset turnover and low return on sales"