Posted By Admin @ September 03, 2022
A company with a high ratio of fixed costs:
- will not be concerned about fluctuating sales.
- is more likely to experience greater profits when sales are up than a company with mostly variable costs.
- will be able to avoid some of the fixed costs when sales decrease by lowering production.
- is more likely to experience a loss when sales are down than a company with mostly variable costs.
Answer:
The correct answer is: more likely to experience a loss when sales are down than a company with mostly variable costs.
Explanation:
The fixed cost ratio is a simple ratio that divides fixed costs by net sales.
The profit formula is:
Profit = Sales- Total cost =(Price * Q)-(FC + VC*Q)
Where
FC=Fixed cost
VC= variable cos t
Q=produce quantity
If sales go down, we have to pay this fixed cost even if we have no sales. So if this Fixed cost are high , is most likely we are going to experience loss