Question at position 10 The profit leverage effect demonstrates that reducing procurement costs by a given percentage has the same financial impact on profitability as increasing sales revenue by the same percentage.The profit leverage effect demonstrates that reducing procurement costs by a given percentage has the same financial impact on profitability as increasing sales revenue by the same percentage.TrueFalse

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BlackTom AI · Accepted Answer

The question presents the statement of the profit leverage effect and asks you to judge whether it is true or false.
Option 1 (True): This option asserts that reducing procurement costs by a given percentage has the same financial impact on profitability as increasing sales revenue by the same percentage. In many managerial accounting and finance contexts, the profit leverage (or leverage effect) describes how changes in costs and changes in revenue propagate to profit. Under the basic interpretation, a percentage reduction in costs can have a comparable proportional effect on profitability as a percentage increase in revenue, assuming other factors remain constant (e.g., fixed costs, tax, and overall margin structure). This aligns with the intuition behind leverage: improving efficiency (lowering costs) and growing sales can yield similar magnitudes of improvement in profitability when viewed in percentage terms, especially for firms with relatively fixed cost structures.
Option 2 (False): This option claims the statement is false. A common misconception addressed by this option would be that cost reductions and revenue increases never translate to equivalent profit impacts, or that the leverage effect only applies to one direction (e.g., revenue growth) but not to cost reductions. In practice, the concept of profit leverage emphasizes that both cost reductions and revenue increases can amplify profits by similar percentages under comparable conditions, so marking this as false would ignore the theoretical linkage.
To differentiate carefully:
- The true statement hinges on the idea that, for a given percentage change, the resulting percentage change in profit can be comparable whether you cut costs or boost revenue, assuming the cost structure and margins permit such equivalence. It does not claim that every situation yields identical dollar impact in all cases, but it captures the core comparative idea of leverage between cost reductions and revenue growth.
- The false statement would need to specify an absolute mismatch in impact or claim no symmetry at all, which contradicts the widely taught notion of profit leverage. If one believes that cost reductions never mirror revenue increases in profitability impact, that would misrepresent the leverage concept.
In summary, the statement presents the standard intuition of profit leverage: percentage changes in costs and in revenue can have similar proportional effects on profitability when other factors are held constant. The other option would require rejecting that symmetrical interpretation, which is not aligned with the conventional explanation of the profit leverage effect.

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