Company A's Cost Structure Includes Costs That Are Mostly Variable

Multiple Choice

Company A's cost structure includes costs that are mostly variable, whereas Company B's cost structure includes costs that are mostly fixed. In a time of increasing sales, which company will tend to realize the most rapid increase in profits? Explain. (Tip: Use operating leverage.)

A) Company A, because it has a higher CM ratio due to lower variable costs.
B) Company B, because it has a higher CM ratio due to lower variable costs.
C) Company B, because it has a lower CM ratio due to higher variable costs.
D) Company A, because it has a lower CM ratio due to higher variable costs.
E) Company A, because it has a higher margin of safety.