Question

    Operating leverage is affected

    by:
    A Fixed costs Correct Answer Incorrect Answer
    B Variable costs Correct Answer Incorrect Answer
    C Sales Correct Answer Incorrect Answer
    D All of the above Correct Answer Incorrect Answer
    E None of the above Correct Answer Incorrect Answer

    Solution

    Operating leverage is a measurement of the degree to which a company incurs a combination of fixed and variable costs. A higher proportion of fixed costs in the production process means that the operating leverage is higher and the company has more business risk. When a firm incurs fixed costs in the production process, the percentage change in profits when sales volume grows is larger than the percentage change in sales.

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