Why Does a Firm Use Operating and Financial Leverage? in What

question 51

Essay

Why does a firm use operating and financial leverage? In what ways does it help the firm and in what ways does it hurt the firm?

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Definitions:

Operating Activities

Business actions that are involved in the day-to-day functions of producing goods, offering services, and other core operations.

Direct Method

A way of allocating service department costs directly to production departments without any consideration for services rendered between service departments.

Operating Activities

Activities that relate directly to the operation of the company, including production, sales, and day-to-day administrative functions.

Net Sales Adjusted

The revenue a company generates from its primary operations after deducting returns, allowances, and discounts.