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A company makes and sells a single product. When sales per month are $6.8 million, total costs are $6.56
million. When sales per month are $5.2 million, total costs are $5.44 million. There is a step cost increase of
$400,000 in fixed costs when sales are $6.0 million, but variable unit costs are constant at all levels of
output and sales.
What is the breakeven point for sales revenue per month?
? $6.0 million
? There are two breakeven points: $5.64 million and $6.36 million
? $5.64 million only
? $6.36 million onlycould you please explain how the answer is B?
If there was not the step-up in the fixed costs, then the total costs when sales are $6.8m would be $6.16m.
So for an increase in sales of 6.8 – 5.2 = 1.6m, there would be an increase in the variable costs of 6.16 – 5.44 = 0.72m. So the variable costs are 0.72/1.6 = 45% of sales and therefore the CS ratio is 1 – 0.45 = 55%.
The total variable overheads for sales of $5.2m must be 45% x $5.2m = $2.34m and so the fixed overheads must be 5.44 – 2.34 = $3.10m (and for sales of more than $6m the fixed overheads must be 3.1 + 0.4 = $3.5m)
Finally, using normal CVP analysis, breakeven sales when sales are below $6m must be 3.10 / 55% = $5.64m, and breakeven sales when sales are above $6m must be 3.5 / 55% = $6.36m.
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