Your firm's sales are estimated to decrease by 10% in the next year.However,soon after the beginning of the year it becomes apparent that the reduction in sales is more likely to be 20%.If your cost of good sold consists of only fixed expenses,which of the following situations would you expect to be true?

Question

Quizplus · Accepted Answer

BWhen a firm's sales decrease, and its cost of goods sold (COGS) consists only of fixed expenses, the percentage negative change in gross profit will be greater than the percentage change in sales. This is because fixed costs remain constant regardless of the level of sales, so a decrease in sales directly reduces gross profit by a proportionally larger percentage. However, if the COGS were variable (directly tied to sales), the impact on gross profit might be different. In this scenario, since COGS are fixed, the reduction in sales has a magnified effect on gross profit, making both A and B correct under different interpretations. A is correct in a straightforward scenario where fixed costs lead to a magnified impact on gross profit. B could be considered correct in a nuanced interpretation where it's compared to a scenario with variable costs, but the primary and most direct answer reflecting the impact of fixed costs on gross profit with decreasing sales is A.

Your Firm's Sales Are Estimated to Decrease by 10% in the Next