CFA Level I · CFA Level I Exam · Industry and Competitive Analysis
During an economic expansion, an analyst observes that a cyclical manufacturer's revenues rise 15% while its operating income rises 30%. The disproportionate increase in operating income is most likely explained by:
The faster growth in operating income is most likely due to a high proportion of fixed operating costs, or operating leverage. When revenue rises, fixed costs do not, so most added revenue flows to profit. Weaker pricing power or counter-cyclical demand would not explain margin expansion in a boom.
- Athe company's high proportion of fixed operating costsCorrect
- Ba decline in the company's pricing power
- Cthe company's counter-cyclical demand profile
Explanation
With high fixed costs (operating leverage), extra revenue adds mostly to profit because costs do not rise proportionally. Lower pricing power would reduce margins, and counter-cyclical demand would not produce rising sales in an expansion.
Did you get it right without looking?
One question tells you little. A timed set on Industry and Competitive Analysis shows your real accuracy, how long you take and where you lose marks.
More Industry and Competitive Analysis questions
- An analyst studies a premium watchmaker that charges prices well above the industry average. Customers value its brand heritage and craftsma…
- A regional cement industry has high fixed costs, slow demand growth, and products that buyers view as undifferentiated commodities. Which fo…
- Which development would most likely reduce the threat of new entrants in an industry?
- A small software firm serves only dental clinics with specialized scheduling tools and charges higher prices than general software vendors. …
- A rapidly aging population in a country is most likely to benefit which industry's long-term demand?
- A company sells a basic product that is nearly identical to its rivals' products. It focuses on driving down its cost per unit through scale…