Hello Chin,
Yes my friend, you are right .. Total variable cost will increase as sales volume increases, while remain unchanged per unit basis.
But, as per given assumption in this question:
Increasing selling price & keeping
variable cost unchanged >>>
Contribution Margin will increase >>> Yey, more operating profits
This leads to one only conclusion: Sales volume is Unchanged
To make it clear, let us apply some numbers to get the same results given by question (Before the adjustments):
Sales volume = 50,000 units .....
Sales price = $10.00 per unit .....
Variable cost = $6.00 per unit >>>>
CM = $4.00 per unitApplying these numbers to get the operating profit: (50,000 x $4.00) - $50,000 = $150,000 .... (Same as given >>>> Our numbers are OK)
Applying these numbers to Break-Even formula: BE point in units = Fixed Cost / CM = $50,000 / $4.00 = 12,500 units
Now, lets us do the adjustments:
Sales volume = 50,000 units .....
Sales price = $11.00 per unit .....
Variable cost = $6.00 per unit >>>>
CM = $5.00 per unitNew sales $ = 50,000 x $10.10 = $550,000
New fixed costs = $50,000 x (1 - 20%) = $40,000
New CM % = $5.00 / $11.00 = 45.45%
Applying these numbers to get the net income: (50,000 x $5.00) - $40,000 = $210,000
Applying these numbers to Break-Even formula:
BE point in units = Fixed Cost / CM = $40,000 / $5.00 = 8,000 units
BE point in $ = Fixed Cost / CM% = $40,000 / 45.45% = 88,000 (Rounded)
Kindly note the followings:
- Operating profit has increased because of increased CM per unit and reduced fixed costs
- Break-even point has decreased because of double formula impact: Reduced fixed costs (Numerator) and increased contribution margin % (Denominator)
- This make sense to our assumptions and conclusion (As per given information)
Hope this detailed illustration will make everything clear, especially the concept of Contribution Margin which is the spine of marginal analysis.
Wish you best of luck, success, safe & healthy condition
Kind regards
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Samer Ahmad, FMVA, SCA
Kuwait
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Original Message:
Sent: 05-30-2020 09:47 PM
From: Chin Hon Lee
Subject: CMA PART 2 Section 3 Question
I think the answer should be $100,000.
Contribution Margin % = $200,000 / $500,000 = 40%
Note that the variable cost needs to change when sales changes. Only the "per unit" remains the same.
Fixed cost = $200,000 - $150,000 = $50,000
If Fixed cost reduced by 20%, the new fixed cost is $40,000
It would be assumed there is no pre-tax profit required when fixed cost reduced by 20%.
Therefore, sales required is $40,000 / 40% = $100,000.
Original Message:
Sent: 05-29-2020 07:58 AM
From: Nitesh Anchan
Subject: CMA PART 2 Section 3 Question
A company has sales of $500,000, variable costs of $300,000, and pretax profit of $150,000. If the company increased
the sales price per unit by 10%, reduced fixed costs by 20%, and left variable cost per unit unchanged, what would be
the new breakeven point in sales dollars?
A. $110,000
B. $100,000
C. $88,000
D. $125,000
Can anyone answer this question ?
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Nitesh Anchan
Accountant
Dubai
United Arab Emirates
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