(b) The requirement is to identify a characteristic of
higher operating leverage. Higher operating leverage involves
more fixed costs, which results in more operating variability and
more risk. Answer (b) is correct because a firm’s profits are more
sensitive to changes in sales volume when the firm is more leveraged.
Answer (a) is incorrect because higher leveraged firms
have less variable costs. Answer (c) is incorrect because the firm
may or may not be more profitable. Answer (d) is incorrect because
a highly leveraged firm is more risky.