Hello sir could u help me solve this question. And pls explain the answer. I'm really confused. Thanks.
Betis Ltd. 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 working day. On a typical working day, staff can produce 40 units. Other fixed costs are $400,000 pa. 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?
A The breakeven reduces by 6000 units and the operating risk goes down
B The breakeven point reduces by 4571 units and the operating risk goes down
C The breakeven point reduces by 4571 units and the operating risk goes up
D The breakeven reduces by 6000 units and the operating risk goes up
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10y ago#1Have you watched out free lectures on CVP analysis? (Our lectures are a complete course for F5 and cover everything you need to be able to pass the exam well).
Currently the contribution is 60 - 20 = 40 per unit, and the fixed costs are 400,000 + 240,000 = 640,000.
Therefore the breakeven is 640,000 / 40 = 16,000 units.
In future, the contribution is 60 - 20 - (200/40) = 35 per unit, and the fixed costs are 400,000. So the new breakeven is 400,000 / 35 = 11,429.
So the breakeven point falls by 16,000 - 11,429 = 4571 units.
Operating risk is not examinable at F5 (it is at F9) and so should not be tested in your book (and do not worry about it). However, higher fixed costs do mean higher risk. So the answer is B.
sir why did u divide 200 by 40? That's where I'm confused.
10y ago#3Because they are paid 200 a day, and they produce 40 units a day. So it is 5 per unit.
Isn't it option c not b? If higher fixed cost means higher risk shouldn't it be option c
1y ago#5Operating risk decreases because the fixed costs are reduced when employees are paid as freelancers, leading to lower overall financial risk for the company.
Thus, the change results in a reduction of the breakeven point by 4,571 units and a decrease in operating risk.
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