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A company makes single product. When sales per month are $6.8m, total cost $6.56m. When sales per month are $5.2m, total cost $5.44m. There is a step cost increase of $400,000 in fixed costs when sales are $6m, but variable unit cost at all value levels of output and sales.
What is the breakeven point for sales revenue per month?
A. $6m
B. There are two BEP : $5.64m and $6.36m
C. $5.64m only
D. $6.36m onlyI am not sure where to start
I calculated the variable cost/unit was 0.70
Total Cost lets use 6.56 = a (fixed costs) + 0.70 (x) units
but now I am stuck
It is not possible to calculate the variable cost per unit because we do not know the number of units at either level!!
The variable cost per $ of revenue = ( (6.56 – 0.4) – 5.44) / (6.8 – 5.2) = 0.45
Therefore the contribution per $ of revenue (the CS ratio) = 1 – 0.45 = 0.55
When sales are 6.8M, fixed costs = 6.56 – (0.45 x 6.8) = 3.5M
(When sales are 5.2M, fixed costs = 5.44 – (0.45 x 5.2) = 3.1M, which is 400,000 lower)Breakeven revenue = fixed costs / CS ratio.
So when fixed costs are 3.1M, breakeven revenue = 3.1M / 0.55 = 5.64M
When fixed costs are 3.5M, breakeven = 3.5M / 0.55 = 6.36MSo the answer is B.
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