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hello sir. Could you help please i didnt get it even if i read an answers at the back. Pease contribute with understanding or remembering it by heart for exam.
73) A company makes and sells a single product. When sales per month are $6.8 million, total costs are $6.56 million. When sales per month are $5.2 million, total costs are $5.44 million. There is a step up cost increase of $400,000 in Fixed costs when sales are $6.0 million, but variable unit costs are constant at all levels of output and sales.
What is the breakeven point for sales revenue per month?
Answer says: there are 2 BE points: 5.64 million and 6.36.
Its explained at the back and I really dont get it. please help 🙂
First you need to use the high low method to get the fixed costs and the variable costs per unit.
The increase in costs are 6.56 – 5.44 = 1.12M, but 0.4M of this is the step up of fixed costs and so the remaining 0.72M are the variable costs for the extra 1.6M of sales.
Therefore the contribution is 1.6M – 0.72M = 0.88M on sales of 1.6M.
Therefore the CS ratio is 0.88/1.60 = 0.55 (or 55%)
You can calculate the fixed costs at both levels (again using the high low method) and then you can apply the normal rules for calculating the breakeven (as explained in my lectures)
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