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At a sales level of $270,000, the magnitude of operating leverage for Donuts Unlimited is 2.8. If sales increase by 15%, profits will increase by:

	a.	15%
	b.	18.67%
	c.	2.8%
	d.	42%

Which of the following statements about highly leveraged companies is true?

	a.	Fixed costs are high and variable costs are low.
	b.	Small changes in sales volume result in larger changes in net income.
	c.	There is a higher possibility of net income or net loss and therefore more risk in a highly leveraged firm.
	d.	All of the above are true.

Select the correct statement regarding fixed costs.

	a.	The fixed cost per unit will decrease when volume increases.
	b.	Since they do not change, fixed costs should be ignored in all decision making.
	c.	The fixed cost per unit will not change when volume decreases.
	d.	The fixed cost per unit will increase when volume increases.

Handy Hiking produces backpacks. In 2007, its highest and lowest production levels occurred in July and January, respectively. In July, it produced 4,000 backpacks at a total cost of $110,000. In January, it produced 2,500 backpacks at a total cost of $87,500. Using the high/low method, the average variable cost of producing a backpack was:

	a.	$31.25
	b.	$30.38
	c.	$27.50
	d.	$15.00

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