- This topic has 5 replies, 2 voices, and was last updated 4 years ago by
.
- Posts
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?Please do not simply type out full questions and expect to be provided with a full answer. You must have an answer in the same book in which you found the question, so in future ask about whatever it is in the answer that you are not clear about and then I will explain.
For breakeven, the contribution must be equal to $1.3M
For sales up to $1.5M, the CS ratio is 45% and therefore when the sales are $1.5M the contribution is 45% x $1.5M = $675,000
So for the contribution to be $1.5M we need extra contribution of 1.3M – 0.675M = $625,000
The CS ratio for sales over $1.5M is 48%, so for an extra contribution of 625,000 we need extra sales of 625,000/0.48 = $1,302,083.Therefore the total sales for breakeven is 1,500,000 + 1,302,083 = $2,802,083.
I sincerely apologize for my mistake sir, I will surely take of that in future.
Here my question was that how did they calculated 48% as CS Ration: Contribution/sales :
= 675000/1500000=45%
So how is it 48%. Also I am very confused that how did we get to know that we need to calculate CS Ratio in it ? Is there any method to understand thatFor sales up to $1.5M, variable costs are 55% of sales. Since contribution = sales – variable costs, the contribution must be 100 – 55 = 45% of sales.
For extra sales over $1.5M, variable costs are 52% of sales. Since contribution = sales – variable costs, the contribution must be 100 – 52 = 48% of sales.
The fact that the question is about breakeven and that variable costs are given as a % of sales is what suggests using the CS ratio.
Have you watched my lectures on DVP analysis?
Yes sir I had watched and by your suggestion I have again watched it. And yes it was refreshed and I understood it now.
Thank you sir !
- The topic ‘Breakeven’ is closed to new replies.