Question

During periods of declining costs, what results in higher EI, lower COGS, and higher GP?

1) Increase in sales volume
2) Decrease in sales volume
3) Increase in production costs
4) Decrease in production costs

Answer 1

During periods of declining costs, an increase in sales volume and a decrease in production costs can result in higher EI, lower COGS, and higher GP. Options 1) Increase in sales volume and 4) Decrease in production costs can both result in higher EI, lower COGS, and higher GP.

Step-by-step explanation:

In periods of declining costs, several factors can result in higher EI (Operating Income), lower COGS (Cost of Goods Sold), and higher GP (Gross Profit).

1. An increase in sales volume can lead to higher EI as more units are sold, lower COGS as the fixed costs are spread over a larger number of units, and higher GP as the difference between revenue and COGS increases.
2. A decrease in production costs can also result in higher EI, lower COGS, and higher GP as the cost to produce each unit decreases, leading to higher profits.
3. On the other hand, a decrease in sales volume may lead to lower EI, higher COGS due to less economies of scale, and lower GP as the difference between revenue and COGS decreases.

Therefore, options 1) Increase in sales volume and 4) Decrease in production costs can both result in higher EI, lower COGS, and higher GP.