Vidyalelo
Commerce · Q40

Financial Management

Graduate and Post Graduate · Commerce · question 40

Q40

When a company uses increased fixed cost for production, this is an example of what type of leverage.

A.
operating leverage
Answer
B.
financial leverage
C.
variable cost leverage
D.
combined leverage

Answer: Option A

Solution

Answer: Option A
Solution:
When a company uses increased fixed cost for production, this is an example of operating leverage. Operating leverage is a cost-accounting formula that measures the degree to which a firm or project can increase operating income by increasing revenue. A business that generates sales with a high gross margin and low variable costs has high operating leverage.