Question

A profit/volume (PN) chart of two companies (A and B) for a period follows:

Required:

By reference to the above chart, justify your conclusion to:

a. i. Estimate the break-even sales revenue of Company A. 

ii. Estimate the total fixed costs of Company A.

iii. State which company has the higher contribution/sales ratio. 

iv. Estimate the level of sales at which the profit of the two companies is the same.

b. Calculate the contribution/sales ratio of Company A and use this to confirm, by calculation, the break-even point identified in Question 4(a)(i) above. 

Answer 1

Ans. a

i) Break-even Point/sales revenue is a point where there is a no-profit-no-loss situation. In other words, total revenue equals total cost i.e, revenues are just sufficient to cover the cost.

Break-even sales revenue for company A = RM 400,000 ( point in graph where profit line cuts the x-axis)

ii) Fixed cost is the cost that does not vary with the level of output. It remains constant irrespective of the level of output produced.

Total fixed cost of company A = RM 180,000 ( The area below the x-axis till the point from where the profit line of company A started)

iii)  Company A :

Contribution margin = Loss + Profit

= RM (180,000 + 90,000)

= RM 270,000

Sales revenue = RM 600,000

Contribution margin ratio = Contribution / Sales * 100

= 270,000 / 600,000 * 100

= 45%

Company B :

Contribution margin = Loss + Profit

= RM( 105,000 + 70,000)

= RM 175,000

Sales revenue = RM 600,000

Contribution margin ratio = Contribution / Sales * 100

= 175,000 / 600,000 * 100

= 29.17%

Hence, company A has the highest contribution/sales ratio.

iv) The profit line of Company A and Company B intersect each other above the x-axis ( as shown in the graph). This is the point where companies profits are the same and the sales revenue level is RM 475,000 (approx).

Hence, the Sales revenue level is Rm 475,000 approx.

Ans. b

Contribution margin ratio = Contribution / Sales * 100

= 270,000 / 600,000 * 100

= 45%

Break-even sales revenue of company A = Fixed cost / Contribution margin ratio

= 180,000 / 45%

= RM 400,000

Hence, The breakeven sales estimated from the graph is same as calculated by formula.