Question

Which of the following statements is true regarding operating leverage? Companies with high operating leverage will...

Which of the following statements is true regarding operating leverage?

Companies with high operating leverage will earn lower profits than companies with low operating leverage.

Companies with high operating leverage will earn higher profits than companies with low operating leverage.

Companies with high operating leverage generally experience fewer profit fluctuations as sales fluctuate than do companies with low operating leverage.

Companies with high operating leverage generally experience larger operating profit fluctuations as sales fluctuate than do companies with low operating leverage

None of the answer choices is correct.
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Answer #1

The answer is Companies with high operating leverage generally experience larger operating profit fluctuations as sales fluctuate than do companies with low operating leverage

Explanation:

  • Companies with high operating leverage experience more significant changes in profit when sales change. Higher the fixed costs higher the operating leverage. Companies in which fixed costs are high managing sales fluctuation is difficult because fixed costs will be incurred irrespective of whether sales happen or not.
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