Asked by
Linda Onunkwo
on Oct 15, 2024
Verified
Which of the following is the correct interpretation of a degree of operating leverage of 5?
A) Operating leverage of 5 means that sales can decrease by 5% before the firm's current level of sales will hit the break-even point.
B) Operating leverage of 5 means that if sales increase by 5% the firm will hit its break-even point.
C) Operating leverage of 5 means that if sales increase by 5%,there will be a 25% increase in the firm's pretax profit.
D) Operating leverage of 5 measures the degree of debt employed by the firm's debt structure.
E) Operating leverage of 5 means that the company would need to increase sales by 5 times in order to hit its break-even point.
Degree of Operating Leverage
A measure that quantifies how much sales revenue can affect operating income due to the presence of fixed costs in a company's cost structure.
Pretax Profit
The profit earned by a company before any tax is deducted, showing the company's earnings directly from its operations.
- Interpret the significance of operating leverage and its effect on business profitability.
Verified Answer
MH
Learning Objectives
- Interpret the significance of operating leverage and its effect on business profitability.