Question

Question 4: Company A has two alternatives as below: Alternative Unit Sales Revenue: $13 Direct Labor Cost : $5 Direct Material Cost : $3 Total Fix Cost : $1.500.000 Alternative 11 Unit Sales Revenue: $13 Direct Labor Cost : $3 Direct Material Cost : $3 Total Fix Cost: $2.100.000 Required: a) According to Alternative I, how much revenue is needed to be earned to reach to Break Even Point? (unit contribution margin ratio) b) According to Alternative II, how much of a revenue need to be earned in order to yield a profit of $700.000? What is contribution margin ratio? c) Which alternative is better? Why?

Answer 1

a) Contribution Margin Ratio = 5/13 = 38.46%

Break Even Point = 1,500,000/38.46%

=$3,900,000

b)Contribution Margin Ratio = 5/13 = 38.46

Revenue need to Earn Profit of $700,000 = (1,500,000 + 700,000)/38.46%

=5,720,000

C) Alternative I is better because the burden of Fixed Cost is less comparison to the Alternative II and contribution Margin is same for both alternative. Alternative II need to More revenue to reach to the Breakeven point than Alternative I