If the break-even multiplier were larger than the direct salary expense multiplier, what would be the outcome for the firm?

• A. The firm would gain money on each job.
• B. The firm would break even exactly.
• C. The firm would lose money on each job.
• D. The firm would have no change in profit.

Answer: (C)

The idea being tested is how cost multipliers determine profitability per job. The break-even multiplier tells you how much revenue you need to cover all costs, while the direct salary expense multiplier shows how much of that revenue is consumed by direct salaries. If the break-even multiplier is larger than the direct salary expense multiplier, the revenue from a job isn’t enough to cover all costs after salaries are paid. In other words, even before considering other overhead, there isn’t enough revenue to cover the total costs, so each job ends up reducing profit or producing a loss. That’s why the firm would lose money on each job.