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Question number 83:
The answer is broken down to:Current breakeven point is: $640,000/40 = 16,000 units
New breakeven point is: $400,000/35 = 11,429 units
Change in level of breakeven is 16,000 – 11,429 = 4,571 units
Current contribution is: $60 – $20 = $40
New contribution is $60 – $20 – $5 = $35
Operating risk reduces with less fixed costs in a business.May I ask why we deduct a further 5 for the new contribution?
I had got the answer option D whereby I get 16000 units as breakeven then decreased to 10000 units but using the same contribution.I do not have the Kaplan Kit (only the BPP Revision Kit), so I cannot help without seeing the question.
If it is labelled as a past exam question then tell me which one, because I have all past exam questions.
Oh it is not a past exam paper.
This is the question:Betis Limited 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 per annum.
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 point reduces by 6,000 units and the operating risk goes down
B The breakeven point reduces by 4,571 units and the operating risk goes down
C The breakeven point reduces by 4,571 units and the operating risk goes up
D The breakeven point reduces by 6,000 units and the operating risk goes upAt the moment the fixed costs are $640,000 and the only variable costs are materials and therefore the contribution per unit is $40.
In future the labour cost becomes variable and therefore is $200/40 = $5 per unit.
Therefore the variable cost is 20 + 5 = $25, and the contribution per unit is 60 – 25 = $35.
The fixed costs reduce to only $400,000.
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