Discussion
Consider the following statements about break-even analysis.
1. At break-even, contribution equals fixed cost 2. Fixed cost per unit falls as output rises 3. A high proportion of fixed cost lowers operating leverage
Answer: B
Correct answer: 1 and 2 only are correct
Statements 1 and 2 are correct. Statement 3 is the reverse of the truth - a high proportion of fixed cost raises operating leverage, making profit more sensitive to volume in both directions. That is exactly why a capital-intensive firm is more exposed in a downturn and more profitable in a boom.
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