Understanding Operating Leverage and Risk: True or False?

'True'. Operating leverage refers to the mix of fixed and variable costs in a business. When a business has high fixed costs and low variable costs, it has a high level of operating leverage. This means that a small change in sales can result in a large change in profits. Therefore, if their income falls, they are at a high risk of making a large loss.

'False'. Someone with relatively high fixed costs and low variable costs will have a high level of operating leverage, not a low level. This means that a small change in sales can result in a large change in profits. Therefore, if their income falls, they are at a higher risk of making a large loss.