Question

Explain why relatively small changes in companies’ revenues can result in relatively large changes in their earnings or losses. In other words, if a company’s sales increase 12%, why do its earnings not also increase 12%?

Answer 1

Ansuur The change in earnings ar losses will depend upon the the fixed and variable cost involved in the business and ich the sales con crosses the fixed cost level the quantum of profits will le higher lecause after the equillibrium lend of sales the fixed cost I will not increase with the increase in sales. for eg i If the fixed cost of the company is 120008 Now once the company's stones sales exceeds by 12000 & the Company will sam more profit. Considra in 1st situation the companies tales was 160008 and variable cost is 10% of sales and in 2nd - scranio by companies sales is 20000 $

Date : Page: o In Scenario 1 Sales 18000$ den: fixed Cost (2000$ Jus: Vaowalele cox 1600$ 2400$ Scenario 2 20000$ 12000$ 2000$ 60008 Teds ut can be seen that with increase du 25t. of sales I there is increase un profit 150%. This is just because once the sales exceeds its fixed cost level the profit fixed I cost remains constant and does not exceed with the increase in sales.