Changes in sales cause changes in profits. Would the profit change associated with sales changes be larger or smaller if a firm increased its operating leverage? Explain your answer.
To explain: Whether the change in profit associated with change in sales be larger or smaller if a firm increases its operating leverage.
Introduction:
Operating Leverage:
Operating leverage refers to the use of both fixed as well as variable costs to make sales. Change in sales level leads to change in earnings before interest and tax.
Yes, change in profit associated with change in sales will be larger if a firm increases its operating leverage.
Where,
So, the change in profit would be larger if a firm increases its operating leverage.
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