Log Homes on Spec (LHOS) in New Brunswick makes log home kits. Currently, the company does not advertise and has a low selling price for its kits compared to competitors. Next year, the company plans to increase the selling price and begin a wide advertising campaign. Which of the following statements is true?
A) LHOS's breakeven point will be lower next year.
B) LHOS's operating leverage will be higher next year if the same number of units is sold.
C) LHOS's profits will be higher next year.
D) LHOS's margin of safety will be lower next year.

Question

Quizplus · Accepted Answer

Increasing the selling price will increase LHOS's contribution margin per unit, which will increase its operating leverage. However, it is not possible to determine whether LHOS's breakeven point, profits, or margin of safety will be affected solely by this information.

Log Homes on Spec (LHOS) in New Brunswick Makes Log