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1)If company A has a higher degree of operating leverage than company B, then which of the following statements is true? A) Company A has higher variable expenses
1)If company A has a higher degree of operating leverage than company B, then which of the following statements is true?
A) Company A has higher variable expenses.
B) Company A's profits are more sensitive to percentage changes in sales.
C) Company A is more profitable.
D) Company A is less risky.
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Expert Solution
Correct Option: (B) Company A's profits are more sensitive to percentage changes in sales.
Explaination:
If company A has a higher degree of operating leverage than company B, then Company A's profits are more sensitive to percentage changes in sales. Operating leverage is method that measures the degree to which a project can increase income by increasing revenue. Any business that generates high gross margin of sales and low variable costs provides high operating leverage. In this case, Company A has a high degree of operating leverage that generates high gross margin of sales.
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