Discussion
High operating leverage is risky because profit is
Answer: D
Correct answer: very sensitive to a fall in volume
High leverage cuts both ways: the large contribution margin that multiplies profit on the way up multiplies losses on the way down, and the fixed costs continue regardless. A firm with high fixed costs and a narrow margin of safety is therefore acutely exposed to a downturn, which is why such firms watch their capacity utilisation so closely.
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