Question

If two companies have the same total sales and total expenses and make the same product, the volatility of net operating income with changes in sales will tend to be greater in the company with a higher proportion of fixed expenses in its cost structure. True or False?

Answer 1

The volatility of net operating income with changes in sales will tend to be greater in the company with a higher proportion of fixed expenses in its cost structure.

Step-by-step explanation:

True.

The volatility of net operating income with changes in sales will tend to be greater in the company with a higher proportion of fixed expenses in its cost structure.

Let's consider two companies with the same total sales and total expenses, but with different proportions of fixed and variable costs. Company A has a higher proportion of fixed expenses, while Company B has a higher proportion of variable expenses. When sales change, Company A will experience a larger change in net operating income compared to Company B, because its fixed expenses remain constant regardless of sales volume.