Suppose a Firm Increases Its Sales Using Existing Fixed Assets

question 26

Multiple Choice

Suppose a firm increases its sales using existing fixed assets. Everything else equal, what effect will the increase in sales have on the firm's degree of operating leverage (DOL) ?

• A)The DOL should increase.
• B)The DOL should decrease.
• C)The DOL should not change, because the amount of fixed asset does not change.
• D)The DOL should increase if fixed operating costs represent a significant proportion of total operating costs; otherwise, the DOL should decrease.
• E)Because the fixed operating costs are not know, the impact on DOL cannot be determined.

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Definitions:

Unamortized Premium

The portion of a bond's premium that has not yet been amortized or reduced over time through periodic charges to income.

Straight-Line Method

A method of calculating depreciation that allocates an equal amount of an asset's cost to each year of its useful life.

Maturity

The date on which a financial obligation or investment becomes due for payment.

Face Value

The nominal value stated on financial instruments, such as bonds or stock certificates, representing the amount to be repaid at maturity.