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John Moffat.
John Moffat.-
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wroheet
- Topics: 8
- Replies: 1
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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 : 2,802,000Breakeven 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 = 2.7083Please tell me where did I get wrong!
this question is from the BPP kit.
John Moffat
- Topics: 57
- Replies: 49583
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Up 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.
phungnguyen266
- Topics: 2
- Replies: 2
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Dear tutor,
I also have question for this too.
Can I assume that “variable cost / sale ratio + C\S ratio = 1”?Thank you.
John Moffat
- Topics: 57
- Replies: 49583
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Yes, 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.
wroheet
John Moffat
phungnguyen266
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