The correct answer is: A. operating leverage.
Operating leverage is the relationship between a company’s fixed costs and its variable costs. A company with high operating leverage has a large proportion of fixed costs, while a company with low operating leverage has a large proportion of variable costs.
When a company uses increased fixed cost for production, it is increasing its operating leverage. This means that the company’s profits will be more sensitive to changes in sales volume. If sales volume increases, the company’s profits will increase by a larger amount than if the company had lower operating leverage. However, if sales volume decreases, the company’s profits will decrease by a larger amount than if the company had lower operating leverage.
Here is a brief explanation of each option:
- Option B: Financial leverage is the relationship between a company’s debt and its equity. A company with high financial leverage has a large proportion of debt, while a company with low financial leverage has a large proportion of equity.
- Option C: Variable cost leverage is the relationship between a company’s variable costs and its sales. A company with high variable cost leverage has a large proportion of variable costs, while a company with low variable cost leverage has a small proportion of variable costs.
- Option D: Combined leverage is the combined effect of operating leverage and financial leverage. A company with high combined leverage has a large proportion of both fixed costs and debt, while a company with low combined leverage has a small proportion of both fixed costs and debt.