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Good day John How have you been? hope u are good.
Sir,
I was going through BPP study text and I stumbled on a break even time question on MCQ Bank 4, question 4.4 precisely which I could not solve because I could not identify the fixed cost or contribution. I tried to see the answer at the back of the text to understand how the question was been treated and it got complicated.It was answered this way:
Month after launch operating profit cumulative Return
0 0 (800,000)
1 120,000 (680,000)
2 180,000 (500,000)
3 240,000 (260,000)
4 300,000 40,000
I quite understand how the cumulative return was calculated but i can’t understand how the operating profit was calculated.I am sorry but I do not have the BPP study text, and so I do not have the question and therefore cannot help you.
I’m sorry I didn’t realize i did not call out the question,
The question is:
The costs for design and development of a new product are expected to be $800,000. The time from original product concept to market launch will be 8 months. the expected selling price for the product is $8 per unit and the unit cost of sale will be $5. Expected sales per month in the period after product lunch are:MONTH SALES
1 40,000
2 60000
3 80,000
4 100,000
What is the break even time for this product?
Please can you help me now please…
Thank you.The breakeven time is the time it takes to get back the 800,000 that they had to pay for the design an development.
The amount they are getting back is 120,000 (40,000 x 3) after 1 month.
180,0000 after 2 months (so a total now of 300,000).
240,000 after 3 months (so a total now of 640,000)
Now they need an extra 160,000 (800,000 – 640,000)In the 4th month they get 300,000. So it will take them 3 months plus 160,000/300,000 to get back the full amount.
Thank you John.
I quite understand now.
The $3 is gotten by subtracting the expected selling price ($8) from the unit cost of Sale ($5) then this will be used to multiply the sales unit per month until we get to break even.
Thank you. 🙂hello john,
i was going through the course notes test chapter 8 and i am stuck in question 2. i dont understand how you are getting 60% in the answer to get the selling price.
this is the question:
A company manufactures and sells a single product for which the variable cost is $12 and the CS ratio
(contribution to sales) is 40%.
The fixed costs are $80,000 per year.
They are budgeting on selling 12,000 units per year.this is the answer in the course notes:
For breakeven, total contribution = $80,000
Total revenue required = 80,000 / 0.4 = $200,000
Selling price = 12 / 60% = $20 per unit
Budgeted revenue = 12,000 x $20 = $240,000
Margin of safety = ((240,000 – 200,000) /240,000) x 100% = 16.67%
(Alternatively, the same answer can be arrived at by working in units instead of sales revenue)If the contribution is 40% of the sales, then the variable cost must be 60% of the sales.
The variable cost is $12, so the selling price must be 12 / 60% = $20
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