Question

High operating leverage means: Select one: a. 1. The company has relatively low fixed costs. b. 2. The company has relatively high fixed costs. c. 3. The company will have to sell more units than a comparable company with low operating leverage to break even. d. 4. The company will have to sell fewer units than a comparable company with low operating leverage to break even. e. Both (2) and (3) are correct. f. Both (1) and (4) are correct.

Answer 1

Answer:

High operating leverage means:

b. 2. The company has relatively high fixed costs.

d. 4. The company will have to sell fewer units than a comparable company with low operating leverage to break even.

Explanation:

High operating leverage implies that the entity has high gross margin and only needs to sell fewer units to break-even.  When a company has a high operating leverage, it makes a large additional income from just selling a unit of its product.  The variable cost per unit is usually low for such a company, though the fixed costs are relatively high.