Income statements for three companies are provided below:
Required: (a) Prepare new income statements for the firms assuming each sells one additional unit (i.e. each firm sells 21 units)(b) Briefly describe the effect of cost structure on profitability.
What will be an ideal response?
Answers will vary
(a) Income statements
(b) Companies with high operating leverage experience higher profitability when sales increase. The more fixed costs, the higher the fluctuation in net income. Company C has the highest operating leverage, and it experienced the greatest increase in net income with the increase in sales volume.
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