Firm X and Firm Y Compete Within the Same Industry

question 25

Multiple Choice

Firm X and Firm Y compete within the same industry.Firm X manufactures its product using large amounts of direct labour.Firm Y has replaced direct labour with investment in machinery.Projected sales for both firms are 15% less than in the previous year.What will be the projected profits for Firm X compared to Firm Y?

• A)Firm X will lose more profit than Firm Y.
• B)Firm Y will lose more profit than Firm X.
• C)Firm X and Firm Y will lose the same amount of profit.
• D)Neither Firm X nor Firm Y will lose profit.

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Definitions:

Break-Even Point

The point at which total costs equal total revenues, meaning the business is not making a profit or a loss.

Direct Material

Raw materials that can be physically and directly associated with the finished product during the manufacturing process.

Indirect Material

Materials used in the production process but not directly traceable to a finished product, such as lubricants for machinery.

Operating Leverage

A measure of how revenue growth translates into growth in operating income, indicating the proportion of fixed versus variable costs a company has.