Which of the Following Is the Correct Interpretation of a Degree

question 40

Multiple Choice

Which of the following is the correct interpretation of a degree of operating leverage of 5?

• A) Operating leverage of 5 means that sales can decrease by 5% before the firm's current level of sales will hit the break-even point.
• B) Operating leverage of 5 means that if sales increase by 5% the firm will hit its break-even point.
• C) Operating leverage of 5 means that if sales increase by 5%, there will be a 25% increase in the firm's pretax profit.
• D) Operating leverage of 5 measures the degree of debt employed by the firm's debt structure.
• E) Operating leverage of 5 means that the company would need to increase sales by 5 times in order to hit its break-even point.

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Definitions:

Short Run

A time period in economics during which at least one input is fixed while others can be varied to adjust the level of output.

Monetary Policy

Monetary policy involves the management of a nation's money supply and interest rates by the central bank to control inflation, stabilize currency, and achieve economic growth.

Fiscal Policy

Government policy that attempts to influence the economy through changes in government spending and taxes.

Aggregate Demand

Aggregate Demand is the total demand for all goods and services within an economy at a given overall price level and in a given time period.