Question

Fixed costs including depreciation have increased at Leverage Inc., from $4 million to $5.3 million in an effort to reduce variable costs. What must the new variable cost percentage of sales be to break even from an accounting perspective at $20 million?

Answer 1

73.5%

Step-by-step explanation:

Break-even is the level of sales at which the business have no profit no loss. At this point business only covers the the variable and fixed cost.

As we know the break-even sales value can be calculated as follow:

Break-even sales = Fixed cost / Contribution margin ratio

As per given data

Break-even sales = $20 million

Fixed Cost = $5.3 million

Placing value in the formula

$20 million = $5.3 / Contribution margin ratio

Contribution margin ratio = $5.3 million / $20 million = 0.265 = 26.5%

As we know

Contribution margin = Sales - Variable cost

26.5% = 100% - Variable cost ratio

Variable cost ratio = 100% - 26.5% = 73.5%

Answer 2

VC% = 73.5%

The New variable cost percentage of sales = 73.5%

Step-by-step explanation:

Given;

New Fixed cost = $5.3 million

Total cost = $20 million

Total variable cost = $20 - $5.3 = $14.7 million

Variable cost percent=(total variable cost/total cost)×100%

VC% = (14.7/20) × 100%

VC% = 73.5%