Ruben, Inc. is a management consulting firm specializing in pension plans. Its billing rate to clients is $120 per hour, and variable costs average $80 per hour. Fixed costs are $24,000 per month. The income tax rate is 20%.
If variable costs increase by 10% and management increases its billing rate by 10%, what is the effect on the breakeven point, in billable hours?
A) It increases the breakeven point
B) The breakeven point will not change
C) It decreases the breakeven point
D) Cannot be determined

Question

Quizplus · Accepted Answer

First, let's calculate the current breakeven point:

Contribution margin per hour = Billing rate - Variable cost per hour
Contribution margin per hour = $120 - $80
Contribution margin per hour = $40

Breakeven point = Fixed costs / Contribution margin per hour
Breakeven point = $24,000 / $40
Breakeven point = 600 billable hours

Now, let's calculate the new breakeven point after the changes:

New contribution margin per hour = New billing rate - New variable cost per hour
New contribution margin per hour = $132 - $88
New contribution margin per hour = $44

New breakeven point = Fixed costs / New contribution margin per hour
New breakeven point = $24,000 / $44
New breakeven point = 545.45 billable hours

Therefore, the breakeven point decreases from 600 to 545.45 billable hours, which means that the correct answer is C: It decreases the breakeven point.