Question

Question 10 Which of the following is true about the degree of operating leverage? Operating leverage is higher if fixed operating costs are high relative to variable operating costs Higher operating leverage increases the sensitivity of operating income to changes in sales Operating leverage magnifies both profits and losses, helping in the good times and causing pain in the bad times All of the above

Answer 1

Answer :-

All of the above

Explanation :-

Operating leverage is higher when the proportion of fixed cost is higher than proportion of variable cost . So, statement ( I ) is true .

Operating leverage is a measure that tells us about change in operating income with the change in sales . So, higher operating leverage increases the sensitivity of operating income to change in sales that means in case of higher operating leverage , operating income can be increased by increase in sales . So, statement (II) is true .

Operating leverage magnifies both profit and loss . Operating leverage magnifies profit in case of sales growth and magnifies losses in case of sales decline . So, statement (III) is also true .

So, all the statements are true .