The question I have is on the sheet
2 answers:
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Answer:
A. A higher percentage of the high operating leverage firm's costs are fixed.
Explanation:
Let's first focus on what is operating leverage:
It represents the degree on which an increase in sales revenue, will also increase the operating income of the company
So Being Contribution Margin the amount generate for sales, dividing that for the profit, we got the relationship between sales and income.
We can expand those like this
Where Q is the uantity of units sold
and CM is the contribution margin per unit.
Resuming: relationship between sales and operating income
That definition cuts "C" and "D" because they talk about debt, this measurement doesn't involve debt.
Now let's check "A"
It state that higher fixed cost amkes the leverage go higher, let's see if that is true:
Fixed Cost is subtracting in the divisor, so higher fixed cost makes the divisor lower.
When this happens, the result of the division is higher.
So this example is true
<u>As an example:</u>
If you have 100 CM and 80 Fixed cost then
IF you have 100 CM and 50 Fixed cost then