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Which TWO of the following would be implied by a decrease in a company’s operating gearing ratio?
A The company is less profitable
B The company is less risky
C The company has a lower proportion of costs that are variable
D The company has profits which are less sensitive to changes in sales volume
Answer is B and D.
Can you explain D?
By decrease in gearing it means fixed cost are lesser in compare to variable costs. Variable cost is sensitive to sales volume and fixed costs are irrelevant. So the statement would have been correct if said that ‘ company has profit which are more sensitive to changes in sales volume’.
Help me professor.
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