Question

Income Statement Leverage What costs are likely to decline as a percent of sales as a...

Income Statement Leverage

What costs are likely to decline as a percent of sales as a company grows?

What costs are likely to remain as a near-constant percentage of sales as a company grows?

Homework Answers

Answer #1

Fixed costs are likely to decline as a percent of sales as a company grows. In other words fixed cost remain fixed in total as sales grows but fixed cost as a percentage of sales would decrease.

Fixed cost % = Total Fixed Cost / Sales *100

Numerator remains same whereas denominator increase, so ratio decreases.

Variable costs are likely to remain as a near-constant percentage of sales as a company grows.

Variable cost % = Variable cost / sales * 100

Both Variable cost & sales increases in same proportion.

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