Question

Question 1: Company X sells product B Unit sales revenue of product B is 15 TL Unit variable cost for product B is 12 TL Total fixed cost of Company X is 600.000 TL Required: a) Calculate contribution margin ratio for product B. b) Calculate the revenue to be earned in order to yield an operating income of 120.000 TL Use contribution margin method. c) What is total revenue at Break Even Point? Use any method you like. Question 2: Company A is considering two options with the following data: Alternative II Unit Sales Revenue: $18 Unit Variable Cost: $14 Total Fix Cost: $6.000.000 Option I: Unit Sales Revenue: $18 Unit Variable Cost : $16 Total Fix Cost : $2.000.000 Required: a) At what sales volume Company A is indifferent between two alternatives? Explain which alternative is better. b) What is the Break Even Point (BEP) for Option I?

Answer 1

Question -1.

a) Contribution margin = Selling price - Variable cost = 15 -12 = 3

b) Target sales = ( Fixed cost + Desired profit ) / CM ratio.

>> CM ratio = ( CM * 100 ) / Sales = ( 3 * 100 ) / 15 = 20 %

>> Target sales ( Revenue ) = (600 + 120 ) / 20 % = 3600.

c) Break even point = Fixed cost / CM ratio.

>> Break even point ( Revenue ) = 600 / 20 % = 3000.

Question -2.

a) At indifference point both options has equal profits.

Let us assume ' X ' be units sold at indifference point.

>> ( 18 - 16 ) * X - 2000 = ( 18 -14 ) * X - 6000.

>> X = 2000 units.

>> Alternative 1 is better because it has less fixed cost.

b) Break even units = Fixed cost / CM per unit = 2000 / ( 18 -16 ) = 1000 units.

>> Break even sales = 1000 * 18 = 18000.