Coast Cruiseline offers nightly dinner cruises off the coast of Nanaimo and Victoria. Dinner cruise tickets sell for $60 per passenger. Coast Cruiseline's variable cost of providing the dinner is $15 per passenger, and the fixed cost of operating the vessels (depreciation, salaries, docking fees, and other expenses) is $225,000 per month. Under these conditions, the break-even point in tickets is 5,000 and the break-even point in sales dollars is $300,000.
Suppose Coast Cruiseline embarks on a cost-reduction drive and slashes fixed expenses from $225,000 per month to $198,000 per month
. 1. Compute the new break-even point in units and in sales dollars.
2. Is the break-even point higher or lower than under the original conditions?
Explain how changes in fixed costs generally affect the break-even point.
Requirement 1
Breakeven units = 4400 units
Breakeven in dollars= $264,000
Working
A | Sale price | $ 60.00 |
B | Variable cost per unit | $ 15.00 |
C=A-B | Unit Contribution margin | $ 45.00 |
D | Total fixed cost | $ 198,000.00 |
E=D/C | Break Even point in Units | 4400 |
F=A x E | Break Even point in Dollars (360 x 14.41) | $ 264,000.00 |
Requirement 2
Breakeven point is lower in comparison to original condition.
The breakeven has reduced due to reduction in Fixed cost.
.
Increase or decrease in fixed cost changes breakeven point assuming contribution margin remains same.
Breakeven point works on two pillars that are contribution margin and fixed cost.
If contribution margin remains same the breakeven will increase with increase in fixed cost and decrease with decrease in fixed cost.
If fixed cost remains same and Contribution margin decreases the breakeven will increase and vice versa.
Coast Cruiseline offers nightly dinner cruises off the coast of Nanaimo and Victoria. Dinner cruise tickets...
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