When fixed operating costs are incurred by the firm, a change in ____ is magnified into a relatively larger change in earnings before interest and taxes.
A) overhead expenses
B) interest charges
C) labor costs
D) sales revenue

Question

Quizplus · Accepted Answer

When fixed operating costs are incurred, any change in sales revenue will have a greater impact on earnings before interest and taxes (EBIT). This is because fixed costs remain constant, so any increase in sales revenue will result in a more significant increase in EBIT since the increase in revenue goes towards covering fixed costs before it contributes to profit. Conversely, a decrease in sales revenue would result in a larger decrease in EBIT.

When Fixed Operating Costs Are Incurred by the Firm, a Change