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Sir, please help with the following:
Last year Company X produced and sold 120,000 units at a total cosy of $1,100,000.
This year’s budget is for an increase in output to 200,000 units at a total budgeted cost of $1,600,000.
To accommodate the higher output levels fixed costs will rise by $100,000.
The budgeted selling price is $20 per unit.
What is the budgeted breakeven points (in units) for Company X?A. 25,445
B. 33,333
C. 40,000
D. 120,000Please do not simply set me questions and expect me to provide answers. You must have an answer in the same book in which you found the question and so you should ask about whatever it is in the answer that you are not clear about – then I will explain.
You need to use the high low method to calculate the variable and fixed costs. The variable cost is (1,600,000 – 1,100,000 – 100,000) / (200,000 – 120,000) = $5 per unit, and the fixed cost at this years budgeted output is 1,600,000 – (200,000 x $5) = $600,000 and at lower outputs will be $500,000
The contribution per unit is $15 per unit.
Therefore using basic CVP analysis, breakeven is 500,000/15 = 33,333 units.
Have you watched my free lectures on high/low and on CVP analysis?
I did not get the question from a book though, I do have an answer which should be the 40,000 but just couldn’t figured out how they got it. I do not have an explanation for the 40,000.
But after seeing your explanation I see how they got the 40,000: new fixed cost/contribution per unit (600,000/15)=40,000 units.
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