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Dear Sir,
I’m hoping you can help me with this one.
Betis Limited is considering changing the way it is structured by asking its employed staff to become freelance. Employees are currently paid a fixed salary of $240,000 per annum, but would instead be paid $200 per day. On a typical working day, staff can produce 40 units. Other fixed costs are $400,000 per annum.The selling price of a unit is $60 and material costs are $20 per unit.
What will be the effect of the change on the breakeven point of the business and the level of operating risk?
Current contribution is $60-$40=20
In the solution the answer is a new contribution of $60-$40-$5=35Can you please help me to understand how the new figure of 35 is logically calculated?
Kind regards
The contribution is the selling price less the variable costs. If the staff become freelance, then wages become a variable cost (they are only paid when they are working, because they are freelance). Since the pay is $200 per day and they produce 40 units a day, then the variable labour cost is 200/40 = $5 per unit.
Assuming that you have copied everything correctly then there is a typing error in the answer. The new contribution does equal 60 – 40 – 5, but this comes to $15 (and not $35).
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