If company A has a higher degree of operating leverage than company B, then: company A is more profitable. company A has higher variable expenses. company A is less risky. company A's profits are more sensitive to percentage changes in sales.

If company A has a higher degree of operating leverage than company B, then: company A is more profitable. company A has higher variable expenses. company A is less risky. company A's profits are more sensitive to percentage changes in sales.

Cornerstones of Financial Accounting

4th Edition

ISBN:9781337690881

Author:Jay Rich, Jeff Jones

Publisher:Jay Rich, Jeff Jones

Chapter12: Fainancial Statement Analysis

Section: Chapter Questions

Problem 41MCQ

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Question

If company A has a higher degree of operating leverage than company B, then:

company A is more profitable.
company A has higher variable expenses.
company A is less risky.
company A's profits are more sensitive to percentage changes in sales.

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Would each of the following increase, decrease, or have an indeterminant effect on a firms break-even point (unit sales)? a. The sales price increases with no change in unit costs. b. An increase in fixed costs is accompanied by a decrease in variable costs. c. Variable labor costs decline; other things are held constant.
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Is my explanation correct? When the shit in sales toward the lower contribution margin. In the sales mix, if the shift in sales to a product that has a low contribution margin ratio, the break-even point will increase. In this case, the company will generate more sales; hence, the net operating income will increase. Also, the contribution margin ratio will increase. Moreover, the degree of operating leverage will increase, too. Please explain (True or False) in detail.
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