If a firm has low fixed costs relative to all other firms in the same industry,a large change in sales volume (either up or down) would have:
A) a smaller change in EBIT for the firm versus the other firms.
B) no effect in any way on the firms, as volume does not affect fixed costs.
C) a decreasing effect on the cyclical nature of the business.
D) a larger change in EBIT for the firm versus the other firms.
E) None of these.

Question

Quizplus · Accepted Answer

If a firm has low fixed costs relative to all other firms in the same industry, then its contribution margin will be high. This means that a large change in sales volume (either up or down) would have a smaller effect on its EBIT (earnings before interest and taxes) compared to other firms with higher fixed costs. This is because firms with higher fixed costs have a lower contribution margin and a larger portion of their costs is fixed, meaning that a change in sales volume will have a disproportionately large effect on their EBIT. Therefore, choice A is the correct answer.

If a Firm Has Low Fixed Costs Relative to All