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vv-7 - Chapter 10 Answers 1 The statement is correct...

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Chapter 10 Answers 1. The statement is correct because some operating and financing costs are fixed. Hence, as revenues increase, costs increase at a lower rate. The lower rate of increase in costs causes operating profit and net income to increase disproportionately. The greater the percentage of fixed cost embedded in the firm’s cost structure, the greater will be the disproportionate growth of the profitability measures. 2. There are many possibilities – rent (lease), insurance, employee salaries, timed heating/cooling systems in commercial buildings, self-checkout at Wal-Mart, ATMs, check-in kiosks at airports, pay-at-the-pump gasoline stations, automatic car wash machines, etc. 3. B: by definition, business risk is the variability in operating profit (or EBIT). 4. B: an indirect expense that is NOT RELATED TO QUANTITY is a fixed cost. 5. DOL measures the relationship between the percentage change in EBIT and the percentage change in revenue. In this case, revenue increases by 15% while operating profit increases by 24.58% ([97,175 - 78,000] / 78,000).
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