Ruben 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 $24,000 per month. The income tax rate is 20%. If fixed 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

The breakeven point in billable hours can be calculated using the formula:
Breakeven point (in hours) = Fixed costs / (Price per hour - Variable cost per hour)

Initially, the breakeven point can be calculated as follows:
Breakeven point = $24,000 / ($120 - $80) = 600 hours

If fixed costs increase by 10%, the new fixed costs would be $26,400 per month.

If management increases its billing rate by 10%, the new billing rate would be $132 per hour.

Using the formula again, the new breakeven point is:
Breakeven point = $26,400 / ($132 - $80) = 360 hours

Therefore, the breakeven point decreases by 240 hours or 40%. This is because the increase in billing rate provides a higher contribution margin per hour, making it easier to cover the fixed costs.

Ruben Ltd Is a Management Consulting Firm Specialising in Pension Plans