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:

Fixed Expenses

Costs that do not fluctuate with the volume of production or sales, such as rent, salaries, and insurance.

Opportunity Cost

The loss of potential gain from other alternatives when a particular alternative is chosen.

Variable Manufacturing Costs

Costs in manufacturing that vary with the level of production output, including direct labor, materials, and utilities.

Direct Labor

The labor costs directly associated with the manufacture of products, typically wages for workers who physically produce the goods.