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Break-even point question

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA PM Exams › Break-even point question

  • This topic has 1 reply, 2 voices, and was last updated 1 year ago by John Moffat.
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  • Author
    Posts
  • January 11, 2022 at 7:08 am #645632
    letty23
    Member
    • Topics: 7
    • Replies: 8
    • ☆

    A company makes two products with the following characteristics:

    Product X Product Y
    Contribution to sales ratio 0.3 0.5
    Selling price per unit 3 4.8
    Maximum demand 8000 3000

    Fixed costs are $9,000.

    What is the minimum revenue required for production to break even?
    A $20,400
    B $25,800
    C $29,400
    D $24,000

    The answer is A in which they calculate the BEP sales separately. As it is two products, shouldn’t we use weighted average c/s ratio to calculate the BEP?

    January 11, 2022 at 9:05 am #645637
    John Moffat
    Keymaster
    • Topics: 56
    • Replies: 51583
    • ☆☆☆☆☆

    We only use the weighted average if the products have to be produced in the same ratio.

    This question does not say that and so the fastest way of achieving breakeven is to produce Product Y first (because it has the highest CS ratio.

    If they produce as many as possible of product Y (which is 3,000) then they will get a contribution of 3,000 x 0.5 x $4.80 = $7,200.

    They need an extra $1,800 to break even, They cannot sell any more of Y, so they will sell X and they therefore need to get revenue from X of $1,800 / 0.3 = $6,000.

    So the minimum revenue needed is 3,000 x $4.80 = $14,400 (from Y) plus $6,000 from X which is a total of $20,400.

    (I do explain this in my free lectures on CVP analysis)

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