A company makes single product. When sales per month are $6.8m, total cost $6.56m. When sales per month are $5.2m, total cost $5.44m. There is a step cost increase of $400,000 in fixed costs when sales are $6m, but variable unit cost at all value levels of output and sales.
What is the breakeven point for sales revenue per month?
A. $6m
B. There are two BEP : $5.64m and $6.36m
C. $5.64m only
D. $6.36m only
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Break even Points with stepped cost
I actually worked it out but it was to no avail. I could not find an answer that matches with any answers above. I tried to use high low method to find out the fixed cost but it was not making sense to me.
10y ago#2First, in order to calculate the variable cost, we need to forget the step-up in the fixed cost. So if there were no step up then when sales were 6.8M the total costs would be 6.16M
So using high low, the variable cost = (6.16 - 5.44) / (6.8 - 5.2) = 0.45 per $ of sales.
Therefore the contribution = (1 - 0.45) = 0.55 per $ of sales.
Therefore the CS ratio = 0.55.
The fixed costs (still ignoring the step up) is 5.44 - (0.45 x 5.2) = 3.1M and therefore with the step up is 3.5M
Breakeven revenue = fixed costs / CS ratio.
So if fixed costs are 3.1M then the breakeven is 3.1 / 0.55 = 5.64M
If fixed costs are 3.5M then the breakeven is 3.5 / 0.55 = 6.36M
So the correct answer is B
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