Which of the following statements is false ? As a firm increases its operating l
ID: 2624445 • Letter: W
Question
Which of the following statements is false? As a firm increases its operating leverage for a given quantity of output, this:
a.
changes its operating cost structure.
b.
increases its business risk.
c.
increases the standard deviation of its EBIT.
d.
increases the variability in earnings per share.
e.
decreases its financial leverage.(2 points)
Please EXPLAIN each of the choice.
a.
changes its operating cost structure.
b.
increases its business risk.
c.
increases the standard deviation of its EBIT.
d.
increases the variability in earnings per share.
e.
decreases its financial leverage.(2 points)
Explanation / Answer
e.
decreases its financial leverage
is false. Rest all are true
Operating Leverage is defined as A measurement of the degree to which a firm or project incurs a combination of fixed and variable costs.
1. A business that makes few sales, with each sale providing a very high gross margin, is said to be highly leveraged. A business that makes many sales, with each sale contributing a very slight margin, is said to be less leveraged. As the volume of sales in a business increases, each new sale contributes less to fixed costs and more to profitability.
2. A business that has a higher proportion of fixed costs and a lower proportion of variable costs is said to have used more operating leverage. Those businesses with lower fixed costs and higher variable costs are said to employ less operating leverage.
e.
decreases its financial leverage
is false. Rest all are true
Operating Leverage is defined as A measurement of the degree to which a firm or project incurs a combination of fixed and variable costs.
1. A business that makes few sales, with each sale providing a very high gross margin, is said to be highly leveraged. A business that makes many sales, with each sale contributing a very slight margin, is said to be less leveraged. As the volume of sales in a business increases, each new sale contributes less to fixed costs and more to profitability.
2. A business that has a higher proportion of fixed costs and a lower proportion of variable costs is said to have used more operating leverage. Those businesses with lower fixed costs and higher variable costs are said to employ less operating leverage.
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