As compared to companies with low operating leverage, companies with high operating leverage have:

• A. higher sensitivity of profits to changes in sales volume
• B. less risk during economic downturns
• C. lower fixed costs relative to variable costs
• D. more flexibility in adjusting production levels

Answer: (A)

Verified step by step guidance

1. Understand the concept of operating leverage: Operating leverage measures the proportion of fixed costs in a company's cost structure. High operating leverage means a company has a higher proportion of fixed costs relative to variable costs.
2. Recall how fixed and variable costs affect profit sensitivity: Because fixed costs do not change with sales volume, companies with high fixed costs (high operating leverage) experience larger changes in profit when sales volume changes, compared to companies with low fixed costs.
3. Analyze the impact on profit sensitivity: When sales increase, companies with high operating leverage see a more than proportional increase in profits because fixed costs remain constant while revenues increase. Conversely, when sales decrease, profits fall more sharply.
4. Evaluate risk during economic downturns: High operating leverage implies higher fixed costs, which means less flexibility to reduce costs when sales decline, leading to higher risk during downturns.
5. Summarize the comparison: Therefore, companies with high operating leverage have higher sensitivity of profits to changes in sales volume, higher fixed costs relative to variable costs, and less flexibility in adjusting production levels.