The Fan Corp

question 52

Multiple Choice

The Fan Corp. in 2016 had revenues of $24,000, variable costs of $12,000, fixed operating costs of $4,000, interest expenses of $2,000, no taxes, and net income = $6,000. The financial leverage effect for this company is

• A) 1.333
• B) 2
• C) 3
• D) 4

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Definitions:

Differential Analysis

A decision-making tool that examines the financial impact of alternative business decisions by focusing only on the relevant costs and benefits that differ between choices.

Fixed Factory Overhead

The consistent, non-variable expenses incurred by a manufacturing plant, which are required to maintain the production process but do not fluctuate with the level of output.

Operating Expense

Costs associated with the day-to-day running of a business, such as rent, utilities, and salaries, but excluding the cost of goods sold.

Normal Selling Price

The regular price at which a good or service is typically sold, excluding any discounts or promotional offers.