Question

The profit leverage effect (ratio) is calculated by A. dividing 1.0 by the profit margin. B. dividing pretax earnings by the cost of goods sold. C. dividing sales by the cost of goods sold. D. none of the above

Answer 1

Answer:

D. none of the above

Explanation:

The profit leverage effect shows that in order to increase net profits, it is better and more efficient to reduce operating expenses rather than increasing total net sales revenue. I.e. a $1 decrease in costs increases operating profits by $1, which is much more than the increase resulting from increasing sales by $1.