Which of the following statements is not true? Select one: a. Operating leverage

Question

Which of the following statements is not true?

Select one:

a. Operating leverage refers to the extent to which a company's net income reacts to a given change in sales.

b. Companies that have higher fixed costs relative to variable costs have higher operating leverage.

c. When a company's sales revenue is increasing, high operating leverage is good because it means that profits will increase rapidly.

d. When a company's sales revenue is decreasing, high operating leverage is good because it means that profits will decrease at a slower pace than revenues decrease.

Explanation / Answer

When a firm has higher operating leverage , it has higher amount of fixed cost than variable costs. A firm with high opearting leverage has more impact of change in sales on the net profit of the company. That means for a firm with high operating leverage , a small increase in sales will result in much higher increase in net profit and a small reduction is sales will result in much greater reduction is net profit.

Therefore the statement d. When a company's sales revenue is decreasing, high operating leverage is good because it means that profits will decrease at a slower pace than revenues decrease ; is not correct.

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