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A company has a sales budget of $1.6m and budgeted fixed costs of $840,000. It’s C/S ratio is 60%. It is considering a change in the production method, requiring no investment outlay, that would reduce variable costs by 10% but increase fixed costs by 20%.
What would be the effect of introducing the change in production method?
A The breakeven point would be higher and the margin of safety would be higher
B the breakeven point would be higher but the margin of safety would be lower
C the breakeven point would be lower but the margin of safety would be higher
D the breakeven point would be lower but the margin of safety would be lowerCould you tell me what the correct answer is with explanation please?
Why are you attempting questions for which you do not have an answer? You should be using a Revision Kit from one of the ACCA approved publishers – they have answers and explanations!!
(If you have been set this as a test question, then we do not do your homework for you 🙂 )Currently, breakeven sales revenue is 840,000/60% = $1.4M, and therefore currently the margin of safety is $200,000.
Currently the variable costs are 40% x $1.6M = $640,000.
The new variable costs will be 90% x $640,000 = $576,000, so the contribution is $1,024,000 and the CS ratio is therefore 64%.
The new fixed costs are 120% x 840,000 = $1,008,000.
So the new breakeven sales are 1,008,000/64% = $1.575MSo the breakeven is higher and the margin of safety is lower.
Thank you so much sir.
They did have the answer at the back of the textbook, but I was trying to understand as to how did they get to that answer through an arithmetical approach.
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