Questions: Required information Which of the following statement is true? Multiple Choice - Operating leverage refers to a company's ability to increase its sales volume while decreasing its total fixed cost. - Operating leverage may help a company increase its profitability but it cannot decrease profitability. - To benefit from operating leverage a company must have both fixed and variable costs.

The answer is: To benefit from operating leverage a company must have both fixed and variable costs.

Explanation for each option:

1. Operating leverage refers to a company's ability to increase its sales volume while decreasing its total fixed cost.

   • This statement is incorrect. Operating leverage actually refers to the degree to which a company uses fixed costs in its cost structure. It measures how a percentage change in sales volume will affect profits. It does not involve decreasing total fixed costs.

2. Operating leverage may help a company increase its profitability but it cannot decrease profitability.

   • This statement is incorrect. While operating leverage can indeed amplify profits when sales increase, it can also amplify losses when sales decrease. High operating leverage means that a company has a higher proportion of fixed costs, which can lead to greater variability in profits.

3. To benefit from operating leverage a company must have both fixed and variable costs.

   • This statement is correct. Operating leverage arises from the presence of fixed costs in a company's cost structure. A company with only variable costs would not experience operating leverage because its costs would change directly with sales volume. Fixed costs create the potential for operating leverage because they remain constant regardless of sales volume, allowing for greater profit margins as sales increase.