AICPA Exam CPA-Business Topic 2 Question 90 Discussion

Actual exam question for AICPA's CPA-Business exam

Question #: 90
Topic #: 2

[All CPA-Business Questions]

A company has total costs of $100,000, of which 40% is variable costs. What is the operating leverage?

A.40

B.60

C1.5

D2.5

Show Suggested Answer

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.

by Filiberto at Jun 19, 2024, 06:33 AM

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Mitzie

5 months ago

I'll have to go with A) .40 on this one. After all, the variable costs are 40% of the total, so the operating leverage should be that number, right? Or maybe I'm just operating under the wrong leverage...

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Jettie

5 months ago

All this talk about costs and leverage is making my head spin. Can we just flip a coin and call it a day?

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Svetlana

5 months ago

Hmm, this one's tricky. I'm going to go with B) .60 since the variable costs are 40% of the total costs, so the fixed costs must be 60%.

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5 months ago

I think the answer is C) 1.5. The operating leverage is the ratio of fixed costs to variable costs, and with 40% variable costs, the fixed costs must be 60%.

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Suzan

5 months ago

That's correct. The operating leverage is calculated by dividing total costs by variable costs, so in this case it would be $100,000 / $40,000 = 2.5.

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Kara

5 months ago

I think the answer is C) 1.5. The operating leverage is the ratio of fixed costs to variable costs, and with 40% variable costs, the fixed costs must be 60%.

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Andra

6 months ago

I think the answer is C) 1.5

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