If Two Companies Have the Same Total Sales and Total

question 119

True/False

If two companies have the same total sales and total expenses and make the same product, the volatility of net income with changes in sales will tend to be greater in the company with a higher proportion of fixed expenses in its cost structure.

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Definitions:

Annual Fixed Costs

The total of all business expenses that are consistent and unchanged throughout the fiscal year, regardless of production levels or sales volume.

Contribution Margin

The contribution margin represents the portion of sales revenue that is not consumed by variable costs and contributes to covering the company's fixed costs.

Depreciation Expense

A technique in accounting for distributing the expense of a physical asset across its usable life.

Fixed Costs

Expenses that do not change with the level of activity or output over a short period, such as rent, salaries, and insurance premiums.