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

question 116

Multiple Choice

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

• A) M's magnitude of operating leverage was lower than N's.
• B) N would suffer more than M from an equal drop in sales revenue.
• C) M'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:

Production Possibility Frontier

A curve demonstrating the maximum potential output levels of two goods or services an economy can achieve when all resources are efficiently utilized.

Economic

Relating to the principles and practices of economics or the economy; the study of how societies use scarce resources to produce valuable commodities and distribute them among different people.

Entrepreneur

An individual who starts and runs a new business, taking on financial risks in the hope of profit.

Henry Ford

An American industrialist and the founder of Ford Motor Company, known for revolutionizing the automotive industry through the introduction of mass production techniques.