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answer to the question is highlighted in red.
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13. Kimbes Karstore has fixed charges associated
with the manufacture and sale of its inventory, including depreciation. As a result,
if Kimbes’ sales increase by 5 percent, its _______ will increase by _______ 5
percent.
a. earnings
before interest and taxes (EBIT); less than
b. EBIT;
the same
c. EBIT; greater than
d. EPS;
less than
e. gross
profit; greater than
Kimbes Karstre has operating leverage, thus DOL > 1.0. As a
result, if sales increase by 5 percent, Karstore’s EBIT (or NOI) will increase
by greater than 5 percent. Note that the firm’s net income will also increase
by greater than 5 percent.
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