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A company has a sales budget of $1.6 million and budgeted fixed costs of $840,000. Its contribution/sales 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%.
I worked out the current position: Breakeven point : 840000/0.60 = 1400000
Margin of safety: 1600000-1400000/1600000 = 12.5%However I am not sure how to work out the change in production method.
New breakeven point and New margin of safety.
Could you help me with this?
At the moment, for every $100 of sakes, the contribution will be $60 and therefore the variable cost will be $40.
If variable costs reduce by 10% then in future, for every $100 of sales, the variable cost will be $36 and therefore the contribution will be $64.
Therefore the new CS ration will be 64%.
The new fixed costs will be $840,000 + 20% = $1,008,000Now you can calculate breakeven and margin of safety in the normal way 🙂
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