Which of the following types of firms is most likely to have a high degree of operating leverage? A) A fine clothing retailer. B) A firm providing residential house cleaning services. C) A firm that develops and sells complex software. D) A restaurant.
The answer is C because the software company has high skilled labour and high fixed cost.
I agree C it is because they need to pay high salaries no matter what - high fixed costs
I was thinking A or D because retailer’s and restaurants both have high fixed costs, but could be wrong, looks like a very vague question.
ok I add to my answer… the restaurant might have high fixed costs but it certainly increases with the number of clients… you can also kinda say that about a retailer… but a software company does not really increase costs depending on how much of the software they sell … thats why I stick to C
C should be more appropriate coz’ to manufacture that complex s/w its going to cost them enough (fixed cost) and to sell the s/w to 1 extra client will cost them few dollars to burn a CD and pack it. Infact shipping would cost them more than burning &packing and comparing to the FC/ VC ratio technically there is no VC atall. But yet its a retarded questions. Now adays, people build custom software and depending on the amount of work, they hire consultants/contractors which indeed add to the work as a vc only. Since they said “develops and sells complex software” I would presume it to be a product development company and so C
I thought exactly as Swan - I was finally able to shortlist A and D and then decide to go with D. Schweser say’s it’s C I would have never thought Hilton/Sheraton/Starwood/Hyatt are lightly leveraged and could be poofed-off from location A to lcoation B since they have no fixed asset and can be kicked around like a football unit.
high DOL means high fixed cost, so looking at the list, you will have to make assumptions and decide which one has highest fixed cost. It looks like it is C to me too.
C