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Hi sir,
Can you please explain BPP 20.16 in words? The answer only shows the calculation and I’m not getting it.
20.16 BR CO has a single product with a selling price of $12 per unit, which is calculated as variable cost per unit, plus 20%. At an output level of 5,000 units it makes a loss of $8,000. What is the company’s total fixed cost?
A: (5,000 x $12 x 20 / 120) + 8,000 = $18,000
Thank you.
For every $100 of variable cost, the selling price must be 100 + (20% x 100) = $120 and the contribution is $20.
Putting it the other way round, for every $120 selling price the contribution must be $20.
Therefore for a selling price of $12, the contribution must be 20/120 x $12 = $2.
For output of 5,000 units the total contribution must therefore be 5,000 x $2 = $10,000.
Given that the profit = contribution – fixed costs, to end up with a loss of $8,000 the fixed cost must be $18,000. (10,000 less 18,000 gives a loss of 8,000)
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