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Betis ltd. is considering changing the way it is structured by asking its employed staff to become freelancer. Employees are currently paid a fixed salary of $240k p.a. but would instead be paid $200 per working day. On a typical working day, staff can produce 40 units. Other fixed costs are 400k.pa.
The selling price of a unit is $60 and material costs are $20 p.u.
What will be the effect of the change in BEP of the business and the level of operating risk?Please do not simply set test question here and expect a solution. Presumably the book in which you found the question also has an answer, so better to ask what problem you are having with the answer!!
I assume that you have watched the free lectures on CVP, and that therefore you are happy with the idea of the breakeven point. (Operating risk can not be asked in F5 – only in F9!)
The current breakeven point is (240,000 + 400,000) / (60 – 20) = 16,000 units per year.
The new breakeven point is 400,000 / (60 – 20 – (200/40)) = 11,429 units per year(The operating risk is in fact reduced because there are more variable costs and less fixed costs)
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