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Fixed costs including depreciation have increased at Leverage Inc., from $4 million to $5.3 million. Suppose that the company now breaks even on an accounting basis with sales of $20 million. What must be the break-even variable cost as a percentage of sales

Respuesta :

The variable cost is 73.5%.

In economics, business, and especially cost accounting, the break-even point is the point at which total cost and total income are equal, i.e. "even." Although opportunity costs have been paid and capital has received the risk-adjusted, projected return, there is no net loss or gain, and one has "broken even." The breakeven point is stated to be reached in investment when the market price of an asset equals its initial cost.

Break even point is computed with the formula given below:

Break even point=Fixed cost/Contribution

Thus, the  contribution =(5.3/20)

                                   =0.265

                                   =26.5%                

                                                                                                                       

Therefore, if sales is assumed to be 100%,contribution=Sales-Variable Cost  

                                                                               =100%-26.5%

                                                                               = 73.5%

Hence, the variable cost is 73.5%.

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