With the Existence of Fixed Operating Costs, a Decrease in Sales

question 201

Multiple Choice

With the existence of fixed operating costs, a decrease in sales will result in ________ in EBIT.

• A) a proportional increase
• B) an equal increase
• C) a less than proportional decrease
• D) a more than proportional decrease

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Definitions:

Operating Cycle

The operating cycle is the time period it takes for a company to purchase inventory, sell it, and convert the sale into cash.

Cash Cycles

The amount of time it takes for a business to convert its investments in inventory and other resources into cash flows from sales.

Accounts Payable Turnover

A financial ratio that measures the rate at which a company pays off its suppliers by comparing total purchases to average accounts payable.

Inventory Sold

The total cost of goods or merchandise a business has sold to customers during a specific period, key for calculating cost of goods sold.