Firms Little Fixed and Big Fixed sell the same product in the same market and have the same sales of 1 million units. Both sell their product for $10 per unit. Little Fixed has a variable cost of $6 per unit and fixed costs of $2 million. Big Fixed has variable costs of $3 per unit and fixed costs of $5 million.
1. Which one of the following statements is FALSE?
a. Big Fixed's breakeven quantity is 714,286 units.
b. Big Fixed's breakeven quantity is more than Little Fixed's breakeven quantity.
c. Big Fixed's operating leverage is higher than Little Fixed's operating leverage.
d. Big Fixed has greater business risk than Little Fixed.
e. Big Fixed's financial leverage is higher than Little Fixed's financial leverage.
2. Which one of the following statements is TRUE
a. Because they face the same sales risk, Big Fixed and Little Fixed are equally risky.
b. Because Little Fixed's variable costs are higher, it is less profitable.
c. Big Fixed probably uses more labor than does Little Fixed.
d. If unit sales decrease by the same amount for both companies, Big Fixed's EBIT would decrease less than Little Fixed's EBIT.
e. If unit sales increase by the same amount for both companies, Big Fixed's EBIT will increase more than Little Fixed's EBIT.