Firms That Have High Operating Leverage

question 27

Multiple Choice

Firms that have high operating leverage

• A)have relatively high levels of fixed costs.
• B)have production costs that are mostly variable.
• C)will have smaller changes in profit when the activity level changes.
• D)are generally thought to be less risky.

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Definitions:

Gross Profit Method

An inventory estimation technique that calculates cost of goods sold and ending inventory based on gross profit margin.

Estimated Ending Inventory

A projection of the value of inventory on hand at the end of an accounting period, often calculated using inventory methods such as FIFO or LIFO.

Gross Profit Rate

The ratio of gross profit (sales minus cost of goods sold) to sales revenue, expressed as a percentage.

Balance Sheet

A financial statement that summarizes a company’s assets, liabilities, and shareholders’ equity at a specific point in time.