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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 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?
A $6.0 million
B There are two breakeven points: $5.64 million and $6.36 million
C $5.64 million only
D $6.36 million onlyA company produces and sells a single product. Budgeted sales are $2.4 million, budgeted fixed costs are $360,000 and the margin of safety is $400,000. What are budgeted variable costs?
A $1.640 million
B $1.728 million
C $1.968 million
D $2.040 millionSir can u explain this with your method in lectures as bpp has used a different one and i cannot understand the solution.
3 P Co makes two products, P1 and P2. The budgeted details for each product are as follows:
P1 P2
$ $
Selling price 10·00 8·00
Cost per unit:Direct materials 3·50 4·00
Direct labour 1·50 1·00
Variable overhead 0·60 0·40
Fixed overhead 1·20 1·00 ––––– –––––
Profit per unit 3·20 1·60 ––––– –––––
Budgeted production and sales for the year ended 30 November 20X5 are:
Product P1 10,000 units
Product P2 12,500 units
The fixed overhead costs included in P1 relate to apportionment of general overhead costs only. However, P2 also
included specific fixed overheads totalling $2,500.
If only product P1 were to be made, how many units (to the nearest whole unit) would need to be sold in order
to achieve a profit of $60,000 each year?
A 25,625 units
B 19,205 units
C 18,636 units
D 26,406 unitsI calculated the fixed costs of P1 only and also the contribution of P1 only. Answer is wrong but i dont understand why because i find it strange that you take the fixed costs of both products but the contribution of only 1 of them.
I don’t know what you mean about using a different method. You cannot just learn rules alone for Paper PM – you need to understand what is happening 🙂
For the first question:
You need to use the high-low method to establish that the variable costs are
((6.56-0.4) – 5.44) / (6.8 – 5.2) = $0.45 per $ of sales (and therefore the CS ration is 0.55), and that the fixed costs are $3.1M at the lower level, stepping up to $3.5M at this higher level.Then use the CS ratio on each of the two levels of fixed costs in the normal way.
For the second question:
Since the margin of safety is $400,000, then breakeven sales must be 2.4 – 0,4 = $2M
Since the profit at breakeven is zero, the contribution at this level of sales must be equal to the fixed costs of $360,000.
Therefore the CS ratio is 360,000/2,000,000 = 18%.Therefore the variable costs must be 82% of sales, and therefore at the budgeted sales of $2.4M, the variable costs must be 82% x $2.4M.
For the third question:
By definition, the total fixed costs of the company will remain the same, whatever products are (or are not) produced. Unless any ff the fixed costs are specific to a particular product.
Therefore the total fixed costs if only P1 is produced are the total budgeted fixed costs less the specific fixed costs of P2 of $2,500, because those fixed costs will not be incurred.
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