Final answer:
The statement is true, where an operating leverage factor of 3.5 implies that a 1% increase in sales volume results in a 3.5% increase in operating income due to the impact of fixed costs on profits. so, option a is the correct answer.
Step-by-step explanation:
The statement is true: An operating leverage factor of 3.5 indicates that if sales volume increases by 1%, operating income will increase by 3.5%. Operating leverage is a measure of how sensitive the operating income is to the change in revenues. A higher leverage indicates that fixed costs make up a larger portion of the total costs, thus when sales increase by a small percentage, the operating income increases by a larger percentage due to these fixed costs being spread over more units. Conversely, if sales decrease, the operating income can also decrease significantly. This concept is particularly important for businesses in their budgeting and financial planning.
The given statement is true. An operating leverage factor of 3.5 indicates that for every 1% increase in sales volume, the operating income will increase by 3.5%. This means that the company has a high degree of fixed costs in its cost structure. As sales increase, the fixed costs remain the same, resulting in a higher percentage increase in operating income.