Question

1. Businesses that are capital intensive tend to have high operating gearing.

2. Businesses with relatively high total variable cost compared with their total fixed​ cost, at their normal level of​ activity, are said to have high operating gearing.
Are the above statements true or​ false?

A. False True
B. True False
C. False False
D. True True

Answer 1

The statements in the question are true. A capital-intensive business has high operating gearing, while businesses with high total variable costs compared to fixed costs also tend to have high operating gearing.

Step-by-step explanation:

The statements in the question are true.

1. A business that is capital intensive has a high proportion of fixed costs compared to variable costs. This means that a large portion of the company's costs are spent on things like equipment, facilities, and infrastructure. These fixed costs do not change with the level of production. High fixed costs result in high operating gearing, which is a measure of the sensitivity of a company's profit to changes in revenue.
2. When a business has relatively high total variable cost compared to its total fixed cost, it means that a larger portion of its costs are variable and depend on the level of production. This is often seen in industries or businesses that require a significant amount of labor or raw materials. In this case, the business has a higher level of operating gearing.

Therefore, the correct answer is Option B: True False.