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Hi
Sorry for the long question.
Example: Products in sequence (BPP text book page 130)
Suppose FA sells 3 products X, Y and, which have a unit variable cost of $3, $4, and $5 respectively. The sales price of X is $8, the price of Y is $6, and the price of Z is $6. Fixed cost per annum is $10,000.
Assume a budgeted sale are 2000 units of X, 4000 units of Y and 3000 units of Z.Solution
The products could be plotted in a particular sequence (say X first, then Y, then Z).Products Cumulative units Cumulative costs Cumulative revenue
$10,000 Nil
X (2000 units) 2000 $16000 $16000
Y (4000 units) 6000 $32000 $40000
Z (3000 units) 9000 $47000 $58000In this case the breakeven point occurs at 2000 units of sales (2000 units of product X). the margin of safety is roughly 4000 units of Y and 3000 units of Z (the text have not illustrated on how to arrive at these figures)
In addition, there is a graph drawn (I don’t see any option to attach the graph here)My question
Please guide on how they arrived at the breakeven point of X and margin of safety of Product Y and Z ?
I have gone through your lectures and also tried to solve by calculating the weighted average contribution per unit but could not arrive at the above answer.I do not have. the BPP Study Text (only the Revision Kit).
However, because there is no mention of having to produce the units in the budgeted ratio, they will produce them in the order of their CS ratios (and the weighted average CS ratio is of no relevance).X has the highest CS ratio, followed by Y and then X so they will be produced in that order.
After making 2,000 units of X, the contribution is 2,000 x $5 = $10,000, and therefore the profit is $10,000 – $10,000 = $0. Therefore breakeven occurs when they have produced 2,000 units of X.
They are budgeted to also produce 4,000 units of Y and 3,000 units of Z. Given that at breakeven they are producing no units of either, the margin of safety is 4,000 units of Y and 3,000 units of Z. (I have no idea whey they should say ‘roughly’, because it is exactly 🙂 )
The graph is not relevant here (and you cannot be asked to draw the graph in the exam).
Just to confirm whether I understood, I have just changed the units of product X.
Assuming that 1000 units of product X are sold and the rest of details are the same (as above)Then for product X
Profit = T. Contribution – FC
= (1000 units * $5) – $10000
= ($5000) lossFor product Y
Profit = T. Contribution – FC
= (4000 units * $2) – $5000 (i have used $5000 here because unit X could only take $5000 of FC)
=Profit = $3000Breakeven point = 1000 units (of product X) and 2500 units (of product Y, got this figure by dividing FC by Contribution per unit = $5000/$2)
Margin of safety for product Y = 4000 units – 2500 units = 1500 units
Margin of safety for product Z = 3000 units
Kindly confirm
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