Question: 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,…

Question: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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