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?
Ans : 2,802,000
Breakeven sales revenue = Fixed cost / CS ratio
CS ratio = Contribution / sales
I don't know how to find the CS ratio right here
total contribution = Sp - Vc = 1.5 m - ( 55%1.5) ???
or
total contribution = 1.5 -( 52% 1.5 ) = 0.72 ??
CS ratio = 0.72/1.5 =0.48
BE ( sales revenue ) = 1.3/0.48 = 2.7083
Please tell me where did I get wrong!
this question is from the BPP kit.
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Breakeven sales revenue
4y ago#1Up to sales of $1.5M, the variable costs are 55% of sales. Therefore the contribution is 45% of sales (so the CS ratio is 55%).
For sales of $1.5M the contribution must therefore be 45% x $1.5M = $675,000.
However for breakeven, the contribution must be equal to the fixed costs of $1.3M. So to reach breakeven they need extra contribution of 1,300,000 - 675,000 = $625,000.
For sales above $1.5M the CS ratio is 48% and therefore for extra contribution of $625,000 the need extra sales (in addition to the $1.5M) of 625,000/0.48.
Dear tutor,
I also have question for this too.
Can I assume that “variable cost / sale ratio + C\S ratio = 1”?
Thank you.
4y ago#3Yes, but it is not an assumption, it is a fact (because the variable cost plus the contribution is always equal to the sales).
It is equal to 1 if the ratios are expressed as decimals. It is equal to 100% if the ratios are expressed as %'s.
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