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1.A company makes and sells a single product. When sales per month are $6.8M, the total costs are $6.56M. When sales per month are $5.2M, the total costs are $5.44M. There is a step cost increase of $400,000 in fixed costs when sales are $6.0M, but variable unit costs are constant at all levels of output and sales.
What is the breakeven sales per month?
-The answer is “There are two breakeven points: $5.64 M and $6.36M”
-The working in the book is actually not easy at all to understand. Could you please help me to obtain the answer.2.A company produces and sells a single product.Budgeted sales is $2.4M, budgeted fixed costs are $360,000 and margin of safety is $400,000 What are the budgeted variable costs?
-The answer is $1.968M
-Using the MOS, I have obtained the BES which is $2M. And at break even, FC=Contribution, therefore $2M-$360K= $1.640M, which is wrong.-Could you please help me firstly to understand what’s wrong in my calculation and also what’s the right way of doing it?
Thanks.
1. You need to use the high low method to calculate the variable costs per $ of sales and the fixed cost at each of the two levels.
When you have the variable costs per $ of sales, you can calculate the CS ratio.
Then you can get the BEP in the normal way.2. The variable costs will be 1.64M when the sales are 2M. However the actual sales are 2.4M and so the actual variable costs will be higher and will be 1.64/2 x 2.4M = 1.968M
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