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

question 139

Multiple Choice

The following information is for Companies M and N for the most recent year: $$\begin{array} { | l | c | c | } \hline & \text { Company M } & \text { Company N } \\\hline \text { Sales } & \$ 500,000 & \$ 500,000 \\\hline \text { Variable costs } & \$ 300,000 & \$ 200,000 \\\hline \text { Fixed costs } & \$ 50,000 & \$ 150,000 \\\hline\end{array}$$ Based on this information,which of the following statements is incorrect?

• 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%.

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Definitions:

Manufacturing Overhead

All indirect costs associated with the production process, like utilities, maintenance, and salaries for production managers.

Predetermined Overhead Rate

A rate calculated before a period begins, used to allocate projected overhead costs to products or services based on a chosen activity base.

Raw Materials

The basic substances or components that are used in the manufacturing process to produce finished goods.

T-Accounts

A visual representation used in accounting to depict the debits and credits of an account, showing two sides of transactions within a ledger.