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Q 20.4
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 $2,802,000-> I know that the C/s ratio is 45% here so breakeven point is 2,888,889; but what is meant by “but at higher volumes of production and sales,the variable cost for incremental production units falls to 52% of sales.” in this question.
At first, for every $100 sales the variable costs are $55.
However when sales go above a total of $1.5M, each extra unit will have variable cost of only $52 for every $100 sales.
That means when sales go above $1.5M; c/s ratio will be 48%. We have two c/s ratio for the same question; how to use this information to arrive at a breakeven point.
You are able to calculate the total contribution for sales of $1.5M.
That will be less than the fixed costs.
So to get breakeven you need to calculate how much extra contribution is needed in total to cover the remaining fixed costs.
When you have this you can use the new CS ratio on it to calculate the extra sales that are needed, and then add it to the $1.5M
Q 21.5
A company is selling a product at a price of $120 per unit.At this price it is selling 200,000 units per period. It has been estimated that for every $5 increase or reduction in price, sales demand will fall or increase by 10,000 units.At what selling price will total sales revenue per period be maximised?
A $80
B $90
C $100
D $110-> P= a – bQ
b= $5/10000 = 0.0005$120 = a – 0.0005 * 200,000
a = 220P = 220 – 0.0005Q
Profit maximised when MR = MC
MR = 220 – 0.0010 Q
MC = Not given in Question ; so how to find the optimum selling price.As per solution of the kit, “Revenue is maximised when marginal revenue = 0 ” ; this is what is not clear to me.
Have you watched the lecture on pricing?
If not, then you must. Because it should then be clear. The graph of the revenue is a curve. As revenue is increasing, the marginal (extra) revenue will be positive. When revenue is decreasing the marginal revenue will be negative. When revenue is at a maximum (at the top of the curve) then the marginal revenue will be zero.
This question does not ask for maximum profit – it asks for maximum revenue.
While solving a question, i came across a situation where Net cost = 1,010,000 and discount on gross cost = 5% ; now how to find the Gross cost. i am stuck in this situation. Please kindly help me out sir.
For every $100 gross cost, the discount will be $5 and therefore the net cost will be $95.
Or to put it the other way round, for every $95 net cost, the gross cost will be $100.
So for your example, since the net cost is 1,010,000, to get the gross cost you multiply by 100/95
@johnmoffat said:
You are able to calculate the total contribution for sales of $1.5M.That will be less than the fixed costs.
So to get breakeven you need to calculate how much extra contribution is needed in total to cover the remaining fixed costs.
When you have this you can use the new CS ratio on it to calculate the extra sales that are needed, and then add it to the $1.5M
Can you explain this further…please.. Im terribly confused
For sales of 1.5M we will get a contribution of 45% x 1.5M = $675,000.
For breakeven we need the total contribution to be equal to the fixed costs of $1.3M.
So we need extra contribution of 1.3M – 675000 = 625,000This means that the total sales will have to be higher than 1.5M.
We know that extra sales will have a CS ratio of 48%, so the extra contribution will be 48% of the extra sales.So……if X is the extra sales, then 48% x X = 625000 (the extra contribution needed)
So X = 625000 / 48% = 1302083
These are the extra sales needed above 1.5M, and so the total sales for breakeven will be 1.5M + 1302083 = 2,802,083
So, to the nearest 1,000, the answer is D.
Q 18.7
The following statements have been made about linear programming analysis.
(1) The sales price of units produced and sold may be a constraint in a linear programming problem.
(2) If a constraint is 0.04x + 0.03y <=2,400, the boundary line for the constraint can be drawn on a graph by joining up the points x = 80,000 and y = 60,000 with a straight line.
Which of the above statements is/are true?
A 1 only
B 2 only
C Neither 1 nor 2
D Both 1 and 2
-> I am unable to understand this question.I assume that you have watched the free lecture on linear programming, in which case you will know that the constraints are things such as a limited supply of materials or a limited supply of labour. i.e. limitations on the resources available. So not (1).
When we draw a constraint on the graph, two points fix a line and so (as I explain in the lecture) the best always is to find x when y = 0 (which for this equation gives 0.04X = 2400, or X = 60,000, and to find y when x = 0 (which for this equation gives 0.03Y = 2400s, y = 80,000)
Point (2) has these values the wrong way round, and so (2) is not correct.
Q 20.9
In context of relevant cost; what is meant by carrying value and realisable value?
Though i was able to solve the question; i was confused with these words.
Please kindly explain, sir.Carrying value is the same as net book value (of non-current assets) and is not relevant.
Realisable value is the sales value, and is relevant.
Q 21.3
A company wishes to go ahead with one of three mutually exclusive projects, but the profit outcome from each project will depend on the strength of sales demand, as follows.
Strong demand Moderate demand Weak demand
Profit/(Loss) Profit Profit/(Loss)
$ $ $
Project 1 70,000 10,000 (7,000)
Project 2 25,000 12,000 5,000
Project 3 50,000 20,000 (6,000)
Probability demand 0.1 0.4 0.5
What is the value to the company of obtaining this perfect market research information, ignoring the cost of obtaining the information?
A $3,000
B $5,500
C $6,000
D $7,500->EV of Project 1 = (70000*0.1) + (10000*0.4) + (-7000*0.5) = 7500
EV of Project 2 = 9800
EV of Project 3 = 10000
And now i am confused what do the next. Please help, sir.Without the perfect information, you will choose project 3 and get an EV of $10,000.
With perfect information, if you are told it will be strong demand then you will choose 1 and get 70,000. If you are told it will be moderate demand you will choose 3 and get 20,000. If you are told it will be weak demand you will choose 2 and get 5,000.
So the expected value with perfect information is (0.1 x 70,000) + (0.4 x 20,000) + (0.5 x 5,000) = 15,500.
So the value of the information is 17,500 – 10,000 = 7,500
Q 21.5
A company is selling a product at a price of $120 per unit.At this price it is selling 200,000 units per period. It has been estimated that for every $5 increase or reduction in price, sales demand will fall or increase by 10,000 units.At what selling price will total sales revenue per period be maximised?
A $80
B $90
C $100
D $110
-> I have the concept of profit is maximised when MR = MC.
But I am unable to understand “Revenue is maximised when marginal revenue = 0”
Please kindly explain sir.The graph of revenue will be a curve (see the lecture to see what I mean) and there will be a maximum.
If we are a point where extra (marginal) revenue is positive, then we can increase the revenue. If we are at a point where marginal revenue is negative then it will result in less revenue.
The maximum will be where the marginal revenue is zero.
Q 21.10
A company makes two products, X and Y, on the sametype of direct labour and production capacity per period is restricted to 60,000 direct labour hours. The contribution per unit is $8 for Product X and $6 for Product Y. The following constraints apply to production and sales:
x <= 10,000 (Sales demand for Product X)
y <= 12,000 (Sales demand for Product Y)
5x + 4y <= 60,000 (Direct labour hours)
The contribution-maximising output is to produce and sell 10,000 units of Product X and 2,500 units of Product Y.
What is the shadow price per direct labour hour and for how many additional hours of labour does this shadow price per hour apply?
A $1.50 per hour for the next 38,000 direct labour hours
B $1.50 per hour for the next 47,500 direct labour hours
C $1.60 per hour for the next 38,000 direct labour hours
D $1.60 per hour for the next 47,500 direct labour hours-> though i am familiar with the shadow price concept, i am unable to understand this question. I am not clear what is the point where profit is maximised. i mean which lines crosses at the profit maximising point. Moreover, how to calculate the next additional labour hour.
Sir, please check the answer of question 21.3. The answer in the BPP is D: 7,500.
Hai Yen: Thank you – it was a silly mistake of mine (that should have been obvious) so I have corrected it.
Amit:
The question tells you at what point the contribution is maximised. It will be where two lines cross, and to find out which 2 lines, but the value of X and Y in each equation and see if all the resource is being used.
It should only take you 2 seconds to realise it is demand for X and direct labour hours.
So now do the normal shadow price workings if there is one extra about hour.
Q 67
Materials Usage Operational variance is calculated by multiplying with Std. Material Cost in solution of the book; but I think it should be multiplied with Revised cost of material.Solution in the book
(Actual Purchase – Revised purchase ) x Std CostWhat I think
(Actual Purchase – Revised purchase ) x Revised CostIs it a printing mistake in the book or i have not rightly understood?
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