With the existence of fixed operating costs, a decrease in sales will result in_________in EBIT.
A) a less than proportional decrease
B) an equal increase
C) a more than proportional decrease
D) a proportional increase

Question

With the existence of fixed operating costs, a decrease in sales will result in_________in EBIT. 
A) a less than proportional decrease
B) an equal increase
C) a more than proportional decrease
D) a proportional increase

Quizplus · Accepted Answer

Fixed operating costs stay the same regardless of changes in sales. Therefore, when sales decrease, the total costs will be spread over fewer units, resulting in a more than proportional decrease in profits. This is known as operating leverage.

With the Existence of Fixed Operating Costs, a Decrease in Sales