Fixed costs including depreciation have increased at Leverage,Inc.from $4 million to $6 million in an effort to reduce variable costs.What must the new variable cost percentage be to leave break-even at $20 million?
A) 60%
B) 65%
C) 70%
D) 75%

Question

Quizplus · Accepted Answer

To calculate the new variable cost percentage, we can use the formula:

Break-even point = Fixed costs / (1 - Variable cost percentage)

We know that the break-even point is $20 million, and the fixed costs have increased to $6 million. Substituting these values in the formula, we get:

$20 million = $6 million / (1 - Variable cost percentage)

Solving for the variable cost percentage, we get:

Variable cost percentage = 70%

Therefore, the best choice is C, with an explanation as shown above.

Fixed Costs Including Depreciation Have Increased at Leverage,Inc