Bob's Baked Goods Company reported the following income statement for 2009:
If Bob's sales next year increase by 20%,Bob's EBIT will increase:

Question

Bob's Baked Goods Company reported the following income statement for 2009:
 If Bob's sales next year increase by 20%,Bob's EBIT will increase:

Quizplus · Accepted Answer

The increase in sales will lead to an increase in revenue and with the assumption that variable costs remain the same, the contribution margin will increase by 20%. Since fixed costs remain the same, the increase in contribution margin will lead to a higher EBIT (operating leverage). However, there is no mention of financial leverage in the question stem, so option D is incorrect. Option A is incorrect because there is operating leverage at play. Option B is incorrect because there is no mention of any change in the capital structure.

Bob's Baked Goods Company Reported the Following Income Statement for 2009