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:

Historical Cost

An accounting principle requiring assets to be recorded at their original purchase price, without adjusting for increases or decreases in value.