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AICPA Exam CPA-Business Topic 3 Question 85 Discussion

Actual exam question for AICPA's CPA-Business exam

Question #: 85
Topic #: 3

[All CPA-Business Questions]

A company has total costs of $100,000, of which 40% is variable costs. What is the operating leverage?

A.40

B.60

C1.5

D2.5

Show Suggested Answer

Suggested Answer: C

Choice 'c' is correct. A shortcut computation for operating leverage is the ratio of fixed costs to variable costs. If total cost is $100,000 and variable cost is 40% of total costs (or $40,000), then fixed costs must be 60% (or $60,000). Operating leverage is then calculated as follows:

$60,000/$40,000 = 1.5

Choice 'a' is incorrect. .4 is obtained by dividing $100,000 into the variable cost of $40,000.

Choice 'b' is incorrect. .6 is obtained by dividing total costs into fixed costs.

Choice 'd' is incorrect. 2.5 is obtained by dividing total costs by variable costs.

by Johnson at Apr 25, 2024, 03:23 PM

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Maybelle

6 months ago

Therefore, the operating leverage can be calculated as 1 / (1 - contribution margin ratio), which gives us 1 / 0.60 = 1.67.

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Roxane

6 months ago

In this case, the variable cost ratio is 0.40, so the contribution margin ratio is 0.60.

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Paris

6 months ago

Right, the contribution margin ratio is 1 - variable cost ratio.

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Temeka

6 months ago

I think we need to first calculate the contribution margin ratio.

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France

6 months ago

I agree, I'm not sure how to approach it.

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Marcos

7 months ago

Wow, that question on operating leverage seems tricky.

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Kiera

7 months ago

Trinidad: That means for every 1% change in sales, the operating income will change by 1.5%.

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Winfred

7 months ago

Virgina: Yes, exactly.

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Trinidad

7 months ago

Ernest: So the operating leverage is 1.5 then?

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Virgina

7 months ago

So, in this case, it would be 60% as 40% is variable costs.

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Ernest

7 months ago

It is calculated as the percentage of fixed costs to total costs.

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Royce

7 months ago

What is the operating leverage?

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