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    More rapid increase in net operating income

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    Able Company and Baker Company are competing companies that sell a product at the same price. Both companies are operating above the break-even point and have similar total profits. Able Company's costs are mostly variable, whereas Baker Company's costs are mostly fixed. In a time of increasing sales which company will tend to realize the most rapid increase in net operating income? Explain your answer.

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    Solution Preview

    Baker Company.
    The reason is that fixed costs do not change with increase in sales, only the variable costs change. So each extra unit sold will increase the operating income by the contribution margin. ...

    Solution Summary

    The solution explains which company would have a more rapid increase in net operating income