Question

Which one of the following characterstics best describes a project that has a low degree of operating leverage?
a) high level of forecasting risk.
b) relatively high initial cash outlay.
c) high variable costs relative to the fixed costs.
d) a high depreciation expense.
e) an OCF that is highly sensitive to the sales quantity.

Answer 1

Answer:

c) high variable costs relative to the fixed costs.

Explanation:

Operating Leverage determines the amount of variable costs and fixed costs incurred during a project combination.

The formula for operating leverage is

Operating Leverage = Fixed Cost ÷ Variable Cost

Therefore. if the operating leverage is lesser this shows clearly that the fixed prices are reduced than the large variable costs.