Define operating leverage and explain why a highly leveraged company may be risky.

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Part $1$

A$.$

Operating leverage is the ratio of relative proportions or combinations of quantities of products that constitute total sales. A highly leveraged company is risky since the more products produced cause costs to go up and total sales to decrease.$$ Therefore, net income decreases as operating leverage ratios increase.

B$.$

Operating leverage is the combination of variable and fixed cost resources used to carry out the$$ firm's activities. A highly leveraged company can create an unstable work environment due to low net income making it risky to stay in business.

C$.$

Operating leverage is the sum of a$$ firm's fixed and variable costs. A highly leveraged company is risky because the higher the costs$$ are, the harder it can become for the firm to make a$$ profit, making costs the main determination when accepting orders.

D$.$

Operating leverage is a$$ firm's ratio of fixed to variable costs. A highly leveraged company has relatively high fixed costs and low variable costs. Such a firm is risky because small changes in volume lead to large changes in net income.