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AICPA Exam CPA-Business Topic 3 Question 85 Discussion
Actual exam question for
AICPA's
CPA Business Environment and Concepts exam
Question #: 85
Topic #: 3
[All CPA Business Environment and Concepts Questions]
Topic #: 3
A company has total costs of $100,000, of which 40% is variable costs. What is the operating leverage?
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.
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