Question

Firms A and B produce exactly the same products, but use different production technology. Firm A's variable costs are greater than those of Firm B, but its operating breakeven point is lower. From this information, other things held constant, we can conclude that Firm B has greater operating leverage than Firm A.

true or false

Answer 1

Answer: True

Operating Leverage is a measure of the combination of fixed cost and variable cost in a cost of production. Company with lower fixed cost and higher variable cost has lower operating leverage and vice versa.

In the give case "Firm A's variable cost are greater than those of firm B, but its operating breakeven piont is lower". It means that Firm A's fixed cost is lower than its variable cost because its operating breakeven point is lower and operating breakeven point = Fixed cost / (sales - variable cost).

So, we can conclude that firm B has greater operating leverage than firm A.

Because firm B's operating breakeven point is higher than firm A's and also its variable costs are lower than those of firm A's. It means that even though firm B's variable cost is lower still it has to make higher volume of sale to achieve its operating breakeven point becasue it has higher fixed cost. According its operating leverage is higher.