The Best Way to Apply the Concept of Operating Leverage

question 9

Multiple Choice

The best way to apply the concept of operating leverage is to realize that

• A) High fixed costs compared to variable costs will always produce a higher EBIT
• B) Higher variable costs compared to fixed costs will always produce higher EBIT
• C) High fixed costs compared to variable costs will provide greater losses as sales decline than the reverse
• D) High variable costs compared to fixed costs will provide greater income as sales increase rather than the reverse
• E) High variable costs relative to fixed costs will provide greater losses as sales decline rather than the reverse

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Definitions:

Sarcasm

Employing irony to ridicule or express disdain.

Functional Fixedness

A cognitive bias that limits an individual to using an object only in the way it is traditionally used, hindering problem-solving.

Heating Vent

An opening designed to allow the passage of warm air from a heating system into a room or building.

Criterion-related Validity

The extent to which a measure is related to an outcome. Criterion-related validity is used to predict future or current performance - it correlates test results with another criterion of interest.