Counters and Green, CPAs, LLP had revenues last month of $46,000 with the only variable costs consisting of 100 hours of staff labor at $130 per hour and 50 hours of partner-level labor at $200 per hour. Fixed costs are $120,000 for the year. Based on this information, which of the following statements about last month's results is correct?

Question

Quizplus · Accepted Answer

The company had labor costs of $23,000 last month: (100 hours of staff labor × $130 per hour) + (50 hours of partner-level labor × $200 per hour)= $13,000 + $10,000 = $23,000. Total variable costs thus amounted to $23,000. Service revenues of $46,000 less variable costs of $23,000 resulted in acontribution margin of $23,000. Contribution margin of $23,000 less $10,000 of fixed costs per month ($120,000 per year ÷ 12 months) equaled operatingprofit of $13,000 for the month. The degree of operating leverage (DOL) is equal to contribution margin of $23,000 ÷ operating income of $13,000 = 1.769,which is not a given answer. Margin of safety is equal to the amount of current sales revenues that exceeds the break-even point in revenues. Break-evenin revenues for the month is equal to fixed costs for the month of $10,000 ÷ contribution margin ratio of 50% ($23,000/$46,000) = $20,000. Therefore, themargin of safety is equal to current revenues of $46,000 less the break-even sales revenue amount of $20,000, or $26,000.

Counters and Green, CPAs, LLP Had Revenues Last Month of $46,000