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a company has fixxed costs of 1.3 mln.Variable costs are 55% of sales up to a sales level of 1.5$ mln, but a higher volumes of production and sales, the variable cost for incremental production units falls to 52% of sales.
c/s-0.45
c/s-0.48F.C———————-(1.3)
contribution(1.5*0.45)–0.675the remaining FC=======0.625/0.48 c/s
BER=====================1.30
add————————————–1.5
total========================2.80what is the BEP iin sales revenue to the nearest $1000
my question here is that why we add sales 1.5 over BER of 1.30?
We need the level of sales that will make the contribution equal to the fixed costs of $1.3M.
We know that sales revenue of $1.5M will give a contribution of 45% x $1.5M = $675,000.
This is not enough contribution so we need an extra 1.3M – 675,000 = $625,000.
So this means we need extra sales of 625,000 / 0.48 = $1,302,083. These are the extra sales needed over and above the $1.5M so as to end up with a total contribution of $1.3M.
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