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

---

Definitions:

Trade-in Allowance

The credit a buyer receives when they trade in an old asset (like a car) towards the purchase of a new asset, reducing the price of the new purchase.

Book Value

The net value of a company's assets as listed on the balance sheet, calculated by subtracting liabilities from total assets.

Commercial Substance

A concept indicating that a transaction significantly changes the economic position or cash flows of the parties involved, beyond mere contractual obligations.

Trade-in Allowance

The amount credited to the buyer by the seller for a traded item, reducing the cost of the new purchase.