ACME,Inc.reported the following income statement for 2009: If ACME's sales next year increase by 20%,ACME's EBIT will increase
A)20%,showing no operating leverage.
B)20%,showing no financial leverage.
C)over 35%,due to operating leverage.
D)over 35%,due to operating leverage and financial leverage.

Question

ACME,Inc.reported the following income statement for 2009:  If ACME's sales next year increase by 20%,ACME's EBIT will increase
A)20%,showing no operating leverage. 
B)20%,showing no financial leverage. 
C)over 35%,due to operating leverage. 
D)over 35%,due to operating leverage and financial leverage.

Quizplus · Accepted Answer

ACME's EBIT will likely increase by more than 20% due to operating leverage. Operating leverage refers to the relationship between fixed and variable costs. In this case, ACME has high fixed costs and relatively low variable costs, which means that a 20% increase in sales will result in a greater than 20% increase in EBIT. This is because the fixed costs will remain the same, but the additional sales will result in more revenue to cover those fixed costs. Therefore, choice C is the best answer.

ACME,IncReported the Following Income Statement for 2009: If ACME's