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Hi John,
In the following question I dont understand why in the answer it is being added 1.5m can give me some light?
A company has fixed costs of $1.3 million. Variable costs are 55% of sales up to a sales level of $1.5 million,
but at higher volumes of production and sales, the variable cost for incremental production units falls to
52% of sales.
What is the breakeven point in sales revenue, to the nearest $1,000?
A $1,977,000
B $2,027,000
C $2,708,000
D $2,802,000The correct answer is: $2,802,000
When sales revenue is $1.5 million, total contribution is 45% × $1.5 million = $675,000.
This leaves a further $625,000 of fixed costs to cover. To achieve breakeven, sales in excess of $1.5
million need to be $625,000/0.48 = $1.302 million.
Total sales to achieve breakeven = $1.5 million + $1.302 million = $2.802 million.Thanks!
For breakeven, the total contribution needs to be equal to the fixed costs of $1.3M.
When sales are $1.5M, the contribution is $675,000 which is less than $1.3M, so sales need to be more that $1.5M.
The answer you have typed then calculates the extra sales needed to be able to get the extra contribution needed for the total contribution to be $1.3M. The extra needed above the $1.5M is $1.302M.
Thanks John one last question is it possible that in CBE exam for PM we will be ask to draw graphs?
No, it is not possible.
I do suggest that you watch my lectures, because I make it very clear that you can no longer be asked to draw any graphs. (However you are expected to understand them. For example, you could be given a graph in the exam and be expected to explain things about it.)
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