Now assume that PSC has a fixed operating expense of $400,000, in addition to Business Risk the variable expense of 60 percent of sales, shown as follows:
Power Software Company Forecasts
Probability of Occurrence
2% 8% 20% 40% 20% 8% 2%
Sales $800 $1,000 $1,400 $2,000 $2,600 $3,000 3,200
Variable Expenses 480 600 840 1,200 1,560 1,800 1,920
Fixed Expenses 400 400 400 400 400 400 400
Recalculate PSC’s business risk (coefficient of variation of operating income). How does this figure compare with the business risk calculated with variable cost only?
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