Answer (B) is correct . Operating leverage is a measure of the degree to which fixed costs are used in the production process. A?company with a higher percentage of fixed costs (higher operating leverage) has greater risk than one in the same industry that relies more heavily on variable costs. However, such a firm is also able to expand production rapidly in times of higher product demand. Thus, the more leveraged a firm is in its operations, the more sensitive operating income is to changes in sales volume.
Answer (A) is incorrect because A firm with higher operating leverage has higher fixed costs and lower variable costs.
Answer (C) is incorrect because A firm with higher leverage will be relatively more profitable than a firm with lower leverage when sales are high. The opposite is true when sales are low.
Answer (D) is incorrect because A firm with higher leverage is more risky. Its reliance on fixed costs is greater.
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