Assume that you are an analyst who is studying the Tirpitz Shipping Company. The company has a fleet of 40 large ships. Right now, about 40% of its operating costs are fixed costs related to depreciation and maintenance of the ships, and the other 60% vary with the amount of cargo it carries. It has idle capacity allowing it to carry up to 20% more cargo than it is now carrying. Using the ideas of cost-volume-profit analysis, explain how you expect Tirpitz’s operating profits to respond to:

A. A 10% increase in cargo, due to improving world economic conditions.

B. A 10% decrease in cargo, due to a worldwide economic slowdown.

If the company said that a 5% decrease in the volume of the cargo carried would only reduce profits by 3%, would you believe them? Why, or why not?