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Betis Ltd 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 $400,00 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?Answer is that breakeven point reduces by 4571 units and the operating risk goes down:
current breakeven $640,000/40 = 16,000 units
new breakevan $400,000/35 = 11,429 units
current contribution is $60 – $20 = $40
new contribution is $60 – $20 – $5 = $35What I don’t understand is where new contribution $35 is coming from? Why down by $5?
If the employees become freelance then they are paid $200 per day. They produce 40 units per day, and therefore there is a variable labour cost of 200/40 = $5 per unit.
In addition there is still the material cost of $20 per unit.
So the total variable cost is $25 per unit and therefore there is a contribution of 60 – 25 = $35 per unit.
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