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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 onlyI 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.
First, 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 = 6.36MSo the correct answer is B
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