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Portland and Hadley operate in the same industry. Portland’s sales, variable costs, and fixed costs are $1,000,000, $700,000, and $100,000, respectively. Hadley’s sales, variable costs, and fixed costs are $1,000,000, $400,000, and $400,000, respectively. If each company experiences an equal increase or decrease in sales, Hadley’s income willA: Go up twice as much as Hadley’s, but go down only half as much as Hadley’s.B: Go up or down twice as much as Hadley’s.C: Go up or down by the same amount as Hadley’s because both companies have equal net income.D: Go up or down half as much as Hadley’s.

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Answer:

The answer is: Portland's income will go D: Go up or down half as much as Hadley’s.

Explanation:

We can simulate different total sales movements:

Portland's sales

Current sales              20% increase                 20% decrease

$1,000,000                 $1,200,000                      $800,000

($700,000)                  ($840,000)                      ($560,000)

($100,000)                  ($100,000)                     ($100,000)                                            

$200,000                    $260,000 (+30%)            $140,000 (-30%)

Hadley's sales

Current sales              20% increase                 20% decrease

$1,000,000                 $1,200,000                      $800,000

($400,000)                  ($480,000)                      ($320,000)

($400,000)                 ($400,000)                     ($400,000)                                            

$200,000                    $320,000 (+60%)            $80,000 (-60%)

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