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Hi Sir John.
I have enquiry for revision kit that valid till 2019. It’s on page 22 number 81. I don’t understand why in the answers section, it explains that contribution is $360,000. I am doing my own calculation and think Revenue is 2.4 million deducted by variable cost 2 million are $400,000 so contribution are $400,000 instead of $360,000. I really don’t get it why it’s $360,000. Please your advice.
Thank you.
At breakeven, the profit must be 0 and therefore the contribution at breakeven must be equal to the fixed costs of 360,000.
Since the margin of safety is 400,000, the breakeven revenue must be 2,400,000 – 400,000 = 2,000,000.
Therefore at breakeven, the revenue is 2,000,000 and the variable costs are 1,640,000 (2,000,000 – 3,600,000).
The budgeted revenue is 2,400,000 which is 20% higher than break even ((2,400,000 – 2,000,000)/2,000,000), and therefore the budgeted variable costs must be 20% higher than the variable costs at breakeven. 1,640,000 + (20% x 1,640,000) = 1,968,000.
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