Question

The concept of operating leverage involves the use of ________ to magnify returns at high levels of operation.

A) fixed costs

B) variable costs

C) marginal costs

D) semivariable costs

Answer 1

Operating leverage uses fixed costs to amplify returns as sales volume increases, creating larger swings in profitability due to the high fixed costs and relatively low variable costs.

Step-by-step explanation:

The concept of operating leverage involves the use of fixed costs to magnify returns at high levels of operation. Operating leverage occurs when a company has high fixed costs relative to its variable costs. In such cases, as sales volume increases, the fixed costs stay constant while profits increase significantly, creating a leveraged effect. This phenomenon is possible due to high fixed costs creating larger swings in profitability with changes in sales volume. Variable costs, on the other hand, fluctuate directly with production levels and do not contribute to operating leverage in the same way.