If a firm does not meet its forecasted sales level, then leverage will result in
ID: 2790122 • Letter: I
Question
If a firm does not meet its forecasted sales level, then leverage will result in a magnified loss in income compared to what is expected because:
inventories will be built very slowly.
sales operations will be reduced drastically.
additional external funds needed will be reduced.
production facilities will be expanded greatly.
retained earnings will increase rapidly.
a.inventories will be built very slowly.
b.sales operations will be reduced drastically.
c.additional external funds needed will be reduced.
d.production facilities will be expanded greatly.
e.retained earnings will increase rapidly.
Explanation / Answer
d.Production facilities will be expanded greatly.
not meeting the forecasted sales level means that firm is not unable to satisfy its expanded capacity fixed costs
and also interest costs of financing the expanded capacities, so the leverage will result in a magnified loss in income.
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