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A company makes and sells a single product. When sales per month are $6.8 million, Total cost are $6.56 million. When sales per month are $5.2 million, Total cost re $5.4 million. There is a step cost increase of $400,000 in fixed cost when sales are $6.0 million but variable cost are constant at all levels of output & sales.
What is the Break even point of sales revenue per month?
a) $6.0 million
b) There are two break even points $5.64 m & $6.36 mill
c) $5.64 mill only
d) $6.36 mill onlyThanks in advance.
Are you sure that you have typed the question correctly? If you have then there is an error in the book that you copied it from.
There is more than one way of getting the same answer – here is one way.
First you need to calculate the variable and fixed costs effectively using the high-low method.
The variable cost (per $ of sales) is (6.56M – 5.4M – 0.4M) / (6.8M – 5.2M) = 0.475
Therefore the CS ratio is 1 – 0.475 = 0.525.So the fixed costs at the lower level of sales are 5.4M – (0.475 x 5.2M) = 2.93M
This would give breakeven sales revenue of 2.93M / 0.525 = 5.58M.
The fixed costs at the higher level of sales are 2.93M + 0.4M = 3.33M
This gives breakeven sales revenue of 3.33M / 0.525 = 6.34MIt would seem therefore that the correct answer is B. However their figures are wrong, and it is not because of rounding 🙂
(Surely the book in which you found the question also has the answer? If it doesn’t then you should be using a different book 🙂 )
sorry the total cost figure is $5.44 million and not $5.4 as earlier stated. and yes sir the question is correct.
For the answer someone in my study group posted the question, the answer will be posted after submission of answers…
Thanks a lot Sir.
If I should use your method the answer will be option d= $6.36m.
One quick question, why did you subtract 0.45 from 1?
Variable cost(per $ of sale) = (6.5m – 5.44m – 0.4m) / (6.8m – 5.2m)
= 0.72/1.6 = 0.45
C/S ratio = 1 – 0.45= 0.55
The fixed cost at the lower of sales are 5.44m – (0.45 * 5.2m) = 3.1m
Breakeven sales of 3.1m/0.55m =5.636m aprox. 5.64m
The fixed cost at the higher level of sales = 3.1m + 0.4m = 3.5m
Breakeven sales rev of 3.5/0.55 = $ 6.36
ans would be B where we would have two break even points of $5.64 & $6.36
Errr……the question as you copied it was not correct 🙂
The reason I subtracted 0.45 from 1 is that the variable costs are 0.475 (47.5%) of the sales.
The contribution is sales less variable costs and so the contribution is 1- 0.475 = 0.525 (or if it makes it more obvious, if the variables costs are 47.5% then the contribution must be 100 – 47.5 = 52.5% of the sales)I hope that makes it clear 🙂
Having corrected the question, your answer is now correct 🙂
Yippeeee!!!!..
Thanks a lot sir, sorry about the mistake i made earlier on. I understand better.
But to get breakeven revenue we always divide the fixed costs by the CS ratio!!
For an explanation as to why, you need to watch my free lectures – I cannot type them all out here.
(The lectures are a complete free course for Paper F5 and cover everything needed to be able to pass the exam well.)Hello Sir,
What would be the relevant lecture video/videos for the above example?
Thanks in advance
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