Question

1. Which of the following statements is true regarding operating leverage?
   1. Companies with high operating leverage generally experience larger operating profit fluctuations as sales fluctuate then do companies with low operating leverages
   2. None of these
   3. Companies with high operating leverage generally experience fewer profit fluctuations as sales fluctuate than do companies with low operating leverage
   4. Companies with high operating leverage will earn higher profits than companies with low operating leverage
   5. Companies with high operating leverage will earn lower profits than companies with low operating leverage
2. Why do companies use the contribution margin income statement format?
   1. for external reporting purposes
   2. None of these
   3. to predict how costs will behave with changes in activity
   4. to comply with generally accepted accounting principles (GAAP)
   5. to present cost of goods sold to external users
3. Cost estimated made using activity levels outside the relevant range:
   1. may result in poor decisions
   2. are more acurate
   3. mean that cost behavior patterns are accurate at all levels of activity
   4. meant the cost estimates will be relevant
   5. None of these

Answer 1

1. Option A. Companies with high operating leverage generally experience larger operating profit fluctuations as sales fluctuate then do companies with low operating leverages. This Happens because the company with higher operating leverage will have higher fixed cost than variable costs which makes operating profit to fluctuate at higher rate when a sale happens

2. Option C. To predict how costs will behave with changes in activity. The company uses contribution income statement to understand Variable cost and fixed cost behavior with respect to sale

3. Option A. May result in poor decisions. The company has to make decisions within relevant range of unit sales. making estimates of per say 100000 units when 10000 units is relevant range will result in poor decisions.