Endeavour Ltd. is a management consulting firm specialising in pension plans. Its billing rate to clients is $120 per hour, and variable costs average $80 per hour. Fixed costs are $38,000 per month. The income tax rate is 20%. If variable costs increase by 20% and management increases its billing rate by 5%, what is the effect on the breakeven point, in billable hours?

Question

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The breakeven point increases because both the increase in variable costs (from $80 to $96 per hour) and the increase in billing rate (from $120 to $126 per hour) affect the contribution margin per hour. The new contribution margin per hour is smaller than before, requiring more billable hours to cover the fixed costs of $38,000.