Question

A firm with high operating leverage has:_____.

a. high fixed costs in its production process.
b. high variable costs in its production process.
c. high costs per unit. low fixed costs in its production process.
d. low costs per unit.

Answer 1

c. high costs per unit. low fixed costs in its production process.

Step-by-step explanation:

Operating leverage is a cost-accounting formula that helps in the measurement of the degree to which a firm or project can increase operating income by increasing revenue. For example, a business that generates sales with a high gross margin and low variable costs has high operating leverage.

Answer 2

a. high fixed costs in its production process

Step-by-step explanation:

Operating leverage is used to compare fixed cost and variable cost of producing a good.

High operations leverage occurs when fixed cost is high and variable cost is low.

This means the production process uses more of fixed assets.

Also high operations leverage are characterised by high product margin an low variable cost. So the higher the revenue the higher the operational income.

This implies that companies make high profit from each additional unit since variable cost is low.