The following information is for Companies M and N for the most recent year: $$\begin{array} { | l | c | c | }
\hline & \text { Company M } & \text { Company N } \
\hline \text { Sales } & \$ 500,000 & \$ 500,000 \
\hline \text { Variable costs } & \$ 300,000 & \$ 200,000 \
\hline \text { Fixed costs } & \$ 50,000 & \$ 150,000 \
\hline
\end{array}$$ Based on this information, select the incorrect statement:
A) M's magnitude of operating leverage was lower than N's.
B) N would suffer more than M from an equal drop in sales revenue.
C) M's cost structure carries greater risk and greater potential for profit.
D) If N's sales increased by 20%, its net income would increase by 40%.

Question

The following information is for Companies M and N for the most recent year: $$\begin{array} { | l | c | c | } 
\hline & \text { Company M } & \text { Company N } \
\hline \text { Sales } & \$ 500,000 & \$ 500,000 \
\hline \text { Variable costs } & \$ 300,000 & \$ 200,000 \
\hline \text { Fixed costs } & \$ 50,000 & \$ 150,000 \
\hline
\end{array}$$ Based on this information, select the incorrect statement:
A) M's magnitude of operating leverage was lower than N's.
B) N would suffer more than M from an equal drop in sales revenue.
C) M's cost structure carries greater risk and greater potential for profit.
D) If N's sales increased by 20%, its net income would increase by 40%.

Quizplus · Accepted Answer

M's cost structure has lower fixed costs, which means it carries less risk and less potential for profit compared to N, which has higher fixed costs and thus higher operating leverage.

The Following Information Is for Companies M and N for the Most