Entity A's proportion of costs that do not vary with volume of sales (depreciation,managers' remunerations,etc. )is larger than that of entity B.Both entities showed a positive income from operations in period X1.If sales revenue for each firm were to increase by the same percentage during X2,which of the four scenarios below would you likely expect to see happen?
A) Entity A's total costs will rise faster rate than those of entity B.
B) Entity A's total costs will rise at a slower rate than those of entity B.
C) Entity A's profit will increase while profit of entity B will stay the same.
D) Entity A's profit will decrease faster than that of entity B will increase

Question

Quizplus · Accepted Answer

Entity A has a larger proportion of costs that do not vary with sales volume, therefore, their total costs will rise at a slower rate than those of entity B when sales revenue for each firm increases by the same percentage during X2. This is because the fixed costs of entity A will remain unchanged, while entity B will have an increase in fixed costs as a proportion of total costs.

Entity A's Proportion of Costs That Do Not Vary with Volume