CMA Study Group

 View Only
  • 1.  CMA PART 2 Section 3 Question

    Posted 05-29-2020 07:59 AM
    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 ?

    ------------------------------
    Nitesh Anchan
    Accountant
    Dubai
    United Arab Emirates
    ------------------------------


  • 2.  RE: CMA PART 2 Section 3 Question

    Posted 05-29-2020 10:28 AM

    Hello Nitesh,

    Prior to sales & cost adjustment:

    • Sales - Variable cost - Fixed cost = Operating profit (Pretax Profit)
    • Fixed costs = $500,000 - $300,000 - $150,000 = $50,000


    After adjustments:

    • New sales = $500,000 x (1 + 0.10) = $550,000   .....  (Unchanged sales volume)
    • Variable costs = $300,000   .....   (Unchanged as per given info)
    • Contribution Margin % = ($550,000 - $300,000) / $550,000 = 45.45%
    • New Fixed costs = $50,000 x (1 - 0.20) = $40,000
    • Break-even point in $ = Fixed costs / Contribution Margin %
    • Break-even point in $ = $40,000 / 45.45% = $88,000

    Key point in this solution is: Sales volume and variable costs are not changed.

    Kind regards

    ------------------------------
    Samer Ahmad, FMVA, SCA
    Kuwait
    ------------------------------



  • 3.  RE: CMA PART 2 Section 3 Question

    Posted 05-29-2020 12:31 PM
    Damn good






  • 4.  RE: CMA PART 2 Section 3 Question

    Posted 05-30-2020 09:38 AM
    Samer with another excellent recap of how the correct answer is achieved!





  • 5.  RE: CMA PART 2 Section 3 Question

    Posted 05-29-2020 10:43 AM

    first of all calculate the contribution 
       sales 500000
    - variable cost 300000 
    =contribution 200000 
    -fc ?
    profit 150000 
    hence to find the fixed cost we have to subtract 200000-150000 = 50000 and it is reduced by 20% hence comes out to be 40000 
    And sales are increased by 10% so revised sales comes out to be 550000
    vc remains the same 300000
    so therefore contribution is 250000
    we have to calculate break even point in revenue 
    so we have to calculate the CMR that is contribution/ sales * 100 
    =250000/550000* 100 = 45.45%

    so BEP in revenue = FC/ CMR
    40000/ 45.45% =88000 is the correct answer 
    hope it is helpful 



    ------------------------------
    Priyanka Sharma
    Other
    Jalandhar
    India
    ------------------------------



  • 6.  RE: CMA PART 2 Section 3 Question

    Posted 05-30-2020 09:48 PM
    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.​


  • 7.  RE: CMA PART 2 Section 3 Question

    Posted 05-31-2020 04:43 AM
    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 unit

    Applying 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 unit

    New 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

    ------------------------------
    Samer Ahmad, FMVA, SCA
    Kuwait
    ------------------------------