Two firms, STM and VPL, have the same contribution margin however VPL's fixed costs (including interest)are greater than STM's.The sales levels and income tax rates of the two firms are the same.We would expect:
A)VPL's income to have the same variability as STM
B)VPL's income to be less variable than STM
C)VPL's income to be more variable than STM
D)Can't determine with the information provided

Question

Quizplus · Accepted Answer

VPL's income would be more variable than STM's because higher fixed costs mean that changes in sales volume will have a greater impact on net income, making it more sensitive to fluctuations in sales.

Two Firms, STM and VPL, Have the Same Contribution Margin