Operating leverage impacts a company by increasing fixed costs and potentially increasing risk. Here's a step-by-step explanation:

1. Operating leverage refers to the proportion of fixed costs to variable costs in a company's cost structure. Fixed costs are those that do not change with the level of output, such as rent or salaries, while variable costs change with the level of production, such as raw materials or direct labor.

2. A company with high operating leverage has a higher proportion of fixed costs. This means that when sales increase, a larger portion of each additional dollar of sales contributes to profits because fixed costs are spread over a larger number of units. This can lead to higher profits.

3. However, the downside is that if sales decrease, the company still has to cover its high fixed costs, which can lead to larger losses. This is why operating leverage can also increase risk.

4. Therefore, the correct answer is: It increases fixed costs and increases risk.

Question

Operating leverage impacts a company by increasing fixed costs and potentially increasing risk. Here's a step-by-step explanation:

1. Operating leverage refers to the proportion of fixed costs to variable costs in a company's cost structure. Fixed costs are those that do not change with the level of output, such as rent or salaries, while variable costs change with the level of production, such as raw materials or direct labor.

2. A company with high operating leverage has a higher proportion of fixed costs. This means that when sales increase, a larger portion of each additional dollar of sales contributes to profits because fixed costs are spread over a larger number of units. This can lead to higher profits.

3. However, the downside is that if sales decrease, the company still has to cover its high fixed costs, which can lead to larger losses. This is why operating leverage can also increase risk.

4. Therefore, the correct answer is: It increases fixed costs and increases risk.

Knowee AI · Accepted Answer

Operating leverage impacts a company by increasing fixed costs and potentially increasing risk. Here's a step-by-step explanation:

1. Operating leverage refers to the proportion of fixed costs to variable costs in a company's cost structure. Fixed costs are those that do not change with the level of output, such as rent or salaries, while variable costs change with the level of production, such as raw materials or direct labor.

2. A company with high operating leverage has a higher proportion of fixed costs. This means that when sales increase, a larger portion of each additional dollar of sales contributes to profits because fixed costs are spread over a larger number of units. This can lead to higher profits.

3. However, the downside is that if sales decrease, the company still has to cover its high fixed costs, which can lead to larger losses. This is why operating leverage can also increase risk.

4. Therefore, the correct answer is: It increases fixed costs and increases risk.

How does operating leverage impact a company?a.It increases fixed costs and reduces riskb.It decreases variable costs and increases riskc.It has no impact on costs or riskd.It only affects short-term financial decisions

Question

Solution

Similar Questions

Upgrade your grade with Knowee