BEPUnits = FC / (S.PPer Unit – VCPer Unit) Or Where
BEPUnits = Break Even Point in Units
FC = Fixed Cost
S.PPer Unit = Selling Price Per Unit
VCPer Unit = Variable Cost Per Unit
CMPer Unit = Contribution Margin Per Unit By putting values
BEPUnits = 54,000,000 / (36,000 – 29,200) BEPUnits = 54,000,000 / 6800
BEPUnits = 7941.18 or 7941 Units
Total Marks: 20
Semester Fall 2019 Managerial Accounting (FIN704) Assignment Solution
FC / CMPer Unit
BEPSales = BEPUnits * S.PPer Unit
BEPSales = FC / Contribution Margin to Sales Ratio
BEPSales = 7941 * 36,000 = Rs. 285,876,000 or Rs.285.88 million
BEPSales = 54,000,000 / (6,800/36,000 * 100) = 54,000,000 / 18.889% = Rs.285.88 million
Result will be higher break-even point if variable cost per Cam Shaft increases as a percentage of selling price.
Reason is that contribution margin will be decreasing on other hand if variable expenses will be increasing as a percentage of selling price. This means that more Cam Shaft units would be required to sell in order to generate enough contribution margins to cover fixed cost of the business.
Net Operating Income 1,034 586
Current Sales = 160,000 Units
New Proposed Sales Volume = 160,000 * 125 / 100 = 200,000 Units Reduced Selling Price = 36,000 * 90 / 100 = Rs. 32,400 Per Unit
As, we can observe from the comparison of present and proposed structure, results are not favorable if factory decides to change the structure and increase the sales volume by reduction in selling price.25% increase in volume is not enough to off-set 10% reduction in selling price.
We can see a reduction in contribution margin both in terms of per unit (from Rs. 6,800 to Rs.3,200) and in total (from Rs. 1,088 million to Rs. 640 million) if factory decides to increase its sales volume up-to 200,000 units of Cam Shaft. On the other hand, fixed cost (Rs. 54 million) is same in both structures. So, less contribution margin will be available to cover fixed cost which ultimately decreases the net operating income from Rs. 1,034 million to Rs. 586 million (almost a 43.32% reduction ((586-1,034)/1,034).
Hence, 10% reduction in selling price will increase 25% sales volume but there will be reduction in contribution margin and net operating income of the business which is not favorable at all.