A high proportion of Company A’s total
costs are variable with respect to units sold; a high...

Question

A high proportion of Company A’s total
costs are variable with respect to units sold; a high proportion of Company B’s
total costs are fixed with respect to units sold. Which company is likely to
have a higher degree of operating leverage (DOL)? Explain.

Sumit · Accepted Answer

The degree of Operating Leverage helps to determine the operating risk of the company based on the structure of fixed and variable costs. Since the fixed costs cannot be changed based on the production of the company, thus the company cannot use these to adjust the operating cost. Thus,

A high proportion of Company A’s total costs are variable with respect to units sold; a high proportion of Company B’s total costs are fixed with respect to units sold. Which company is likely to have...

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