An entity with a higher proportion of fixed costs to total costs compared to an entity with a lower proportion of fixed to total costs is regarded as:

Question

BlackTom AI · Accepted Answer

Operating leverage measures how a firm's operating income (EBIT) responds to a change in sales; a higher proportion of fixed costs increases operating leverage.

1. Relevant concepts
- Fixed costs do not vary with output (e.g., rent, salaried staff); variable costs change with volume (e.g., materials per unit).  
- Contribution margin = Sales − Variable costs.  
- Degree of Operating Leverage (DOL) at a given sales level = Contribution margin / EBIT (or = % change in EBIT / % change in sales). A larger fixed-cost base increases the ratio of contribution margin to EBIT, raising DOL. Higher operating leverage means profits are more sensitive to sales changes.

2. Step-by-step reasoning
- If two entities have the same sales and variable costs but different fixed costs, their contributions are equal but EBIT differs. The entity with higher fixed costs has lower EBIT for the same contribution, so the contribution/EBIT ratio (DOL) is larger. Therefore higher fixed-cost proportion → higher operating leverage.

3. Example calculation (intermediate steps shown)
- Assume price per unit = 20, variable cost per unit = 10, units sold = 100. Contribution = (20 − 10) × 100 = 10 × 100 = 1,000.
- Entity X fixed costs = 100 → EBIT = 1,000 − 100 = 900. DOL = Contribution / EBIT = 1,000 / 900 ≈ 1.11.
- Entity Y fixed costs = 300 → EBIT = 1,000 − 300 = 700. DOL = 1,000 / 700 ≈ 1.43.
- Entity Y (higher fixed-cost proportion) has the higher DOL.

4. Why the correct answer is correct
- Because operating leverage quantifies the amplification effect of fixed costs on operating income, an entity with a higher proportion of fixed costs relative to total costs will indeed have higher operating leverage.

5. Why other choices would be incorrect
- Financial leverage (use of debt) is separate and concerns interest and capital structure, not operating cost structure.  
- Statements like “lower operating risk” are incorrect: higher operating leverage implies greater operating risk (more profit volatility).  
- “Higher variable cost proportion” is the opposite condition and would lower operating leverage.

6. Conclusion
The correct characterization is having a higher operating leverage, which matches the provided answer.

An entity with a higher proportion of fixed costs to total costs compared to an entity with a lower proportion of fixed to total costs is regarded as:单项选择题

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