Two firms,STM and VPL,have the same contribution margin but VPL's fixed costs (including interest)are greater than STM's.The sales and tax rates of the two firms are the same.We would expect:
A) VPL's income to have the same variability as STM
B) VPL's income to be less variable than STM
C) VPL's income to be more variable than STM
D) Can't determine with the information provided

Question

Quizplus · Accepted Answer

VPL's income is more variable than STM's because higher fixed costs increase operating leverage, leading to greater sensitivity of income to changes in sales.

Two Firms,STM and VPL,have the Same Contribution Margin but VPL's