The variable expense ratio is the ratio of variable expenses to which of the following?

• A. Operating Income
• B. Net Sales
• C. Gross Profit
• D. Total Assets

Answer: (B)

Verified step by step guidance

1. Understand the concept of the variable expense ratio: It is a financial metric that measures the proportion of variable expenses relative to a specific financial figure, typically net sales. Variable expenses are costs that change in proportion to sales or production levels.
2. Identify the correct denominator for the variable expense ratio: The ratio is calculated by dividing variable expenses by net sales. Net sales represent the total revenue generated from sales after deducting returns, allowances, and discounts.
3. Clarify why net sales is the correct denominator: Net sales provide a clear and consistent basis for comparison, as they reflect the actual revenue generated by the company. Using other figures like operating income, gross profit, or total assets would not accurately represent the relationship between variable expenses and sales activity.
4. Write the formula for the variable expense ratio: The formula is expressed as: $\frac{\mathrm{Variable Expenses}}{\mathrm{Net Sales}}$. This formula shows the proportion of variable expenses relative to net sales.
5. Apply the formula in practice: To calculate the variable expense ratio, gather the total variable expenses and net sales figures from the financial statements. Divide the variable expenses by net sales to determine the ratio, which is typically expressed as a percentage.