Select the incorrect statement regarding cost structures.
A) Highly leveraged companies will experience greater profits than companies less leveraged when sales increase.
B) The more variable cost, the higher the fluctuation in income as sales fluctuate.
C) When sales change, the amount of the corresponding change in income is affected by the company's cost structure.
D) Faced with significant uncertainty about future revenues, a low leverage cost structure is preferable to a high leverage cost structure.

Question

Quizplus · Accepted Answer

The statement "The more variable cost, the higher the fluctuation in income as sales fluctuate" is incorrect because it is actually the higher fixed costs (not variable costs) that lead to greater fluctuations in income as sales fluctuate. Variable costs change with sales volume, which tends to stabilize income, whereas fixed costs remain constant regardless of sales volume, leading to greater income fluctuation with changes in sales.

Select the Incorrect Statement Regarding Cost Structures