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

question 69

Multiple Choice

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

• A) N's magnitude of operating leverage is lower than M'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:

Unit Contribution Margin

This is the difference between the selling price per unit and the variable cost per unit. It indicates how much each unit sold contributes to fixed costs and profit.

Fixed Expenses

Constant costs incurred by a business, irrespective of the level of goods or services produced.

CVP Graph

A visual representation of the Cost-Volume-Profit analysis that illustrates the relationship between total costs, total sales, and the number of units produced or sold.

Break-even Point

The point where a business's total costs and total revenues are the same, leading to neither a profit nor a loss.