Question

All else being equal, a company with a low operating leverage will have:

A. relatively high contribution margin ratio.
B. relatively high fixed costs.
C. relatively high variable costs
D. relatively high risk.

Answer 1

c) relatively high variable costs

Step-by-step explanation:

Operating leverage is a ratio that is used to analyze and understand the cost structure of a business. It gives the relation between the variable and fixed cost to the the total cost of running the business.

A business with a large amount of fixed cost relative to variable is said to have a high operating leverage . For such business, operating income would be more volatile because the operating income would not increase in commensurate proportion as sales revenue.

And a company with low operating leverage has low amount of fixed cost relative to variable cost and therefore a relatively high variable costs

Operating leverage is calculated as

Contribution /Earnings before interest and Tax