Entity A's Proportion of Costs That Do Not Vary with Volume

question 16

Multiple Choice

Entity A's proportion of costs that do not vary with volume of sales (depreciation,managers' remunerations,etc. ) is larger than that of entity B.Both entities showed a positive income from operations in period X1.If sales revenue for each firm were to increase by the same percentage during X2,which of the four scenarios below would you likely expect to see happen?

• A) Entity A's total costs will rise faster rate than those of entity B.
• B) Entity A's total costs will rise at a slower rate than those of entity B.
• C) Entity A's profit will increase while profit of entity B will stay the same.
• D) Entity A's profit will decrease faster than that of entity B will increase

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Definitions:

Straight-Line Depreciation

A method of allocating the cost of a tangible asset over its useful life in a linear fashion.

Desired Rate

Typically refers to a target interest rate set by an individual or entity, often relating to the return on investment or loan interest rates they wish to achieve.

Average Rate of Return

A measure of the annual return on an investment, calculated by dividing the average annual profit by the initial investment cost.

Sensitivity Analysis

A technique used to determine how different values of an independent variable impact a particular dependent variable under a given set of assumptions.