How much depreciation expense exists in a firm that has a break-even level of revenues of $2 million, fixed costs of $400,000, and a 60 percent ratio of variable costs to sales?
A)$144,000
B)$266,667
C)$400,000
D)$666,667

Question

Quizplus · Accepted Answer

At break-even, total revenues equal total costs. Total costs include fixed costs and variable costs. Given that the break-even revenue is $2 million and the variable cost ratio is 60%, variable costs are $1.2 million (60% of $2 million). Therefore, fixed costs must be $800,000 to reach the $2 million total cost. Since the problem states fixed costs are $400,000, the remaining $400,000 must be depreciation expense.

How Much Depreciation Expense Exists in a Firm That Has