The following information is for Companies M and N for the most recent year: Based on this information, which of the following statements is incorrect?
$$\begin{array} { | l | c | c | }
\hline & \text { Company M } & \text { Company N } \
\hline \text { Sales } & \$ 500,000 & \$ 500,000 \
\hline \text { Variable costs } & \$ 300,000 & \$ 200,000 \
\hline \text { Fixed costs } & \$ 50,000 & \$ 150,000 \
\hline
\end{array}$$
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)N'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: Based on this information, which of the following statements is incorrect?
$$\begin{array} { | l | c | c | } 
\hline & \text { Company M } & \text { Company N } \
\hline \text { Sales } & \$ 500,000 & \$ 500,000 \
\hline \text { Variable costs } & \$ 300,000 & \$ 200,000 \
\hline \text { Fixed costs } & \$ 50,000 & \$ 150,000 \
\hline
\end{array}$$
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)N'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 operating leverage is higher than N's because M has a higher proportion of fixed costs to variable costs. This means that a change in sales revenue will have a greater impact on M's operating income than on N's operating income.

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