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      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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