1. Breakeven point is the activity level at which there is neither profit nor loss.
Breakeven
point(units)= Total fixed costs ![]() |
Contribution per unit= Total
contribution
Number of units
=$525,000300,000
units
= $1.75/unit
Therefore,Breakeven point in terms of
units=$742,400(Total Fixed Costs)
1.75 (contribution per unit)
=424,229 units,ie,this many units need to be sold in order for the company to break even
Breakeven point(sales)=
Total Fixed costs![]() |
The
contribution/sales ratio= contributionsales
=$525,000$1,800,000
=29%
Therefore,Breakeven point in terms of sales
value=$742,4000.29
=$2,545,430,ie,This amount worth of sales need to happen for the company to break even
2. At this point,I think it'd be helpful to set out the per unit costs and price of the product.
Selling price/unit=total Sales value/number of units sold
= 1800,000/300,000
=$6/unit
The Variable cost/unit has to be split into its constituent parts:
=900,000/300,000
=$3/unit
The adjustments that Don wishes to make are:
The Income Statement would then resemble:
Sales($6.35*375,000 units) | 2,381,250 | |
Variable costs: | ||
COGS($3.3*375,000 units) | 1,237,500 | |
Selling expense($0.75*375,000 units) | 281,250 | |
Administrative expense($0.5*375,000 units) | 187,500 | (1,706,250) |
Contribution margin | 675,000 | |
Fixed costs( doesn't change) | (742,400) | |
Net loss | (67,400) |
The net loss decreases by $150,000(217,400-67,400).This plan, although it still doesn't achieve a profit,does earn much less net loss that before.
The new breakeven point in sales would be= 742,400
0.283 [see below]
=$2,623,322
If this plan is followed through,The breakeven sales would increase by $77,892 (2,623,322-2,545,430),ie,the company would have to sell that much amount worth of products more for it to now break even.
The C/S ratio=675,000/2,381,250
=28.3%
3. Dar's plan would require the following adjustments:
If we proceed with Dar's proposal,the income statement would look like:
Sales($5.65*480,000 units) | 2,712,000 | |
Variable expense: | ||
COGS($3*480,000) | 1,440,000 | |
Selling expense($0.9*480,000) | 432,000 | |
Administrative expense($0.5*480,000 units) | 240,000 | (2,112,000) |
Contribution margin | 600,000 | |
Fixed costs: | ||
COGS | 400,000 | |
Selling expense | 282,400 | |
Administrative expense | 100,000 | (782,400) |
Net loss | (182,400) |
The net loss would decrease by an amount of $35,000( 217,400-182,400).
C/S ratio=600,000/2,712,000
=22%
Therefore,Breakeven point in terms of sales=782,400/0.22
=$3,556,364
The company would have to sell $1,010,934 (3,556,364-2,545,430)worth of products more to breakeven,if Dar's proposal is chosen
d) Comparing the 2 proposals:
DON'S PLAN | DAR'S PLAN | |
Net loss | 67,400 | 182,400 |
C/S ratio | 28.3% | 22% |
Breakeven sales | 2,623,322 | 3,556,364 |
In all 3 criterias mentioned above,Don's plan seems more likely to acheive better results than Dar's.For all the aforementioned reasons,I'd recommend Don's proposal.
UESTION 32 An income statement for Don & Dar Company is presented below. Don & Dar...
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