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:

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