Conquer the CLTD Challenge 2025 – Navigate Your Path to Logistics Success!

Question: 1 / 605

In cost-volume analysis, what does high operating leverage indicate?

Low total costs to achieve breakeven

High fixed costs to overcome

High operating leverage refers to a company's cost structure, specifically its proportion of fixed costs relative to variable costs. When a business has high operating leverage, it means that it has a larger amount of fixed costs that must be covered before it can start generating profits. This can lead to greater volatility in operating income because small changes in sales volume can result in significant changes in profits.

A business with high operating leverage can benefit greatly from increased sales since the fixed costs are spread over more units sold, enhancing profitability after breakeven is reached. However, this also means that the company faces higher fixed costs that need to be managed, making it essential for the business to reach a certain level of sales to become profitable. Thus, identifying high fixed costs is crucial for understanding the overall risk and potential returns associated with a firm's operations.

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Higher variable costs per sale

Lower profits per sale beyond breakeven

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