Busn 2011 management accounting
TASK
1
In an Automobile Production, there are two types of costs: direct cost and indirect cost. Direct cost of materials are labor and costs associated with the management of products. Whereas with indirect costs, other expenses such as depreciation or organizational costs are difficult to be authorized in exact products. Types of Direct Example;
Direct Material is cost the cost of the basic materials that may be readily determined per unit. Body panels plastics, Lead acid batteries, Automobile engine, Metals, Car seat material, Tires, Glass for Wind Shields. Direct Labor cost is part of the wage or salary bill, which can be specifically and consistently assigned to or associated with the production of the product, a certain order of work or services. Finishing Operatives wages, Wages for assembly line workers. Indirect production overhead is incurred when the product is manufactured & the cost of manufacturing overhead costs should be assigned to each unit so the products has an impact on the measurement of an individual product's profitability. Supervisor salary, Machine Depreciation, Research and Development, Sundry factory cost, Other factory cost, Factory Electricity cost, Machine repair. Indirect other overhead is the cost that includes activities related to sales and general administrative functions. Sales representative salaries, Office supplies, Corporate staff health care cost, Marketing cost, Office Electricity cost, Administrative cost. WHY? Example
In an Automobile Production, there are two types of costs: direct cost and indirect cost. Direct cost of materials are labor and costs associated with the management of products. Whereas with indirect costs, other expenses such as depreciation or organizational costs are difficult to be authorized in exact products. Types of Direct Example;
Direct Material is cost the cost of the basic materials that may be readily determined per unit. Body panels plastics, Lead acid batteries, Automobile engine, Metals, Car seat material, Tires, Glass for Wind Shields. Direct Labor cost is part of the wage or salary bill, which can be specifically and consistently assigned to or associated with the production of the product, a certain order of work or services. Finishing Operatives wages, Wages for assembly line workers. Indirect production overhead is incurred when the product is manufactured & the cost of manufacturing overhead costs should be assigned to each unit so the products has an impact on the measurement of an individual product's profitability. Supervisor salary, Machine Depreciation, Research and Development, Sundry factory cost, Other factory cost, Factory Electricity cost, Machine repair. Indirect other overhead is the cost that includes activities related to sales and general administrative functions. Sales representative salaries, Office supplies, Corporate staff health care cost, Marketing cost, Office Electricity cost, Administrative cost. WHY? Example
You
are required to suggest:
Fixed cost
Because costs that must be paid by the company, regardless of any business
activity. This is one of the two units of the total cost of goods or services
as well as the variable costs. Body panels plastics, Corporate staff health
care cost, Lead acid batteries, Marketing cost, Automobile Engine, Finishing
Operatives wages, Metals, Machine depreciation, Car seats materials, Wages for
assembly line workers, Tires, Sundry factory cost, Other factory cost,
Supervisor salary, Glass for windshields, Factory Electricity cost, Office
Electricity cost, Administrative cost. Variable costs
Because they shared expenses that alternate in direct bulk to the quantity of output. Research and development, Sales representative salaries, Office supplies, Machine repair. 2) Automobile Production Ltd cost statement for last year
$ $
Direct Materials: Body panels plastics 970 855 Lead acid batteries 520 980 Automobile engine 4 324 650 Metals 2 992 344 Car seat material 905 890 Tires 596 700 Glass for wind shields 833 480 11 144 899 Direct Labor: Finishing Operatives wages 98 900 Wages for assembly line workers 25 378 124 278 PRIME COST 11 269 177
Production Overhead: Supervisor salary 30 300 Machine Depreciation 1 034 Research and Development 150 560 Sundry factory cost 1 245 Other factory cost 548 Factory Electricity cost 6 500 Machine repair 2 423 192 610 PRODUCTION COST 11 461 787
Other Overheads: Sales representative salaries 50 400 Office supplies 3 400 Corporate staff health care cost 10 950 Marketing cost 15 875 Office Electricity cost 1 230 Administrative cost 19 390 101 245 TOTAL COST 11 563 032
Selling price per unit for Automobile Production factory.
Fixed cost
Total Fixed cost
Variable cost
Variable cost
Sales volume (units)
Total variable ($7 850 x 1 000)
Total cost
Mark-up required on cost (11 555 920 x 25%)
Total Cost (including mark-up)
Selling price per unit
($14 444 900 / 1 000)
$
7 850
1 000 units
$
3 705 920
7 850 000
11 555 920
2 888 980
14 444 900
14 444.90
TASK 2
A) Break-even analysis for the automobile production factory. Break-even point (units)
= Total fixed cost ÷ Unit contribution
= 3 705 920 ÷ (14 444.90 – 7 850)
= 3 705 920 ÷ 6 594.90
= 561.9372545451789
= 562 Units
Break-even point (sales)
= Break-even point (units) x Sales per unit
= 562 units x 14 444.90
= $ 8 118 033.80
Margin of safety
= Sales volume – Break-even point (units)
= 1 000 – 562
= 438 units
Target profit of $ 7 900 000
Sales (units)
= $ 14 444.90 – $ 7 850 = $ 6 594.90
= (7 900 000 + 3 705 920) ÷ 6 594.90
= 11 605 920 ÷ 6 594.90
= 1 759.832597916572
= 1 760 units
Sales (dollars)
= 6 594.90 ÷ 14 444.90 = 0.4565
= (7 900 000 + 3 705 920) ÷ 0.4565
= 11 605 920 ÷ 0.4565
= $ 25 423 702.08
3486150234315001600200-114300Break-even chart
0Break-even chart
19431001028700BE point
00BE point
445770034290002811145788670002857500125730008115301669415008001001371600004686300800100Variable cost 00Variable cost
457200080010000
308610066040Margin of safety
0Margin of safety
194310066040Figure 1
0Figure 1
B) From the chart, the following Figure above is:
Breakeven point
Area of loss
Area of profit
Margin of safety
From the chart above is showing that total cost meet total revenue to see the BEP result. For this reason, the BEP unit are 562 units and BEP sales are $8 118 033.80. From the chart above, we can see the yellow shaded is area of loss and the red shaded is area of profit. The orange line is to express the length of Margin of safety. It shows that the volume by which sales can be decrease before the loss will be earn. Accordingly from the margin of safety, 1000 units minus 562 units equal to 438 units, so the margin of safety is 438 units.
M1
The function of this break-even point is to predict the exact amount of sales or profits is almost impossible due to many of our products (with varying amounts of profitability), a lot of customers (with different service requirements), and the interaction between price, promotion and the number of sold units. These and other factors will be complicate the break-even analysis which shown at the figure 1. With the analysis, occurrences will happen according to when the business reaches breaking point, exceeds the breaking point and when it is number of units produced and sold is in the margin of safety. These events that will be explained below will link to the different activity levels using the results of the breakeven analysis. Firstly, the business implications when it is unable to reach the breaking point are, automobile production factory shows that in the figure 1, which is break-even chart that the business is not to make a profit, if the business has not reached the break-even point. If it is below the breakeven point, the business owner will have to pay the loss by itself, otherwise, if the owner cannot pay for loss of business will be bankrupt or failed. From the evidence figure 1, below selling price of 562 units will not be able to get the profit. Example: $ (14 444.90 – 7 850) x 400 units = $ 2 637 960 (Total contribution) $ 3 705 920 (Total fixed cost)
$ 2 637 960 – $ 3 705 920 = $ (1 067 960) / Loss
Secondly, the business will have this effect when it exceeds the breaking point. When these factory revenues that will exceed the costs referred to profits and business owners can keep the profit as income or reinvest profits in the business to growth and the business owner can improve business by making new branches elsewhere. From the figure 1, break-even chart its show that the factory sells more than 562 units that can be exceed to gain much profit. Example: $ (14 444.90 – 7 850) x 800 units = $ 5 275 920 (Total contribution) $ 3 705 920 (Total fixed cost)
$ 5 275 920 – $ 3 705 920 = $ 1 570 000 / Profit
Thirdly, when the business numbers of units produced and sold is in the margin of safety is when the amounts by which the actual sales exceed the break-even sales. It represents the amount of drop in sales, which the company can tolerate. Higher margin of safety, especially as the company can resist variations in sales. A drop in sales in excess of margin of safety will cause a net loss for the period. Example: $ 3 705 920 ÷ (14 444.90 – 7 850) = 562 units (BEP) 800 – 562 = 238 units (margin of safety) In conclusion, these scenarios that are, when it is below the selling price 562 are will not get any profit which is loss & might be the business will be close or bankruptcy. When the business sells more than 562 units they will get more profit and can open more branches. When the business numbers units produced and sold is the margin of safety so the company can resist variations in sales, a drop in sales in excess of margin of safety will cause a net loss for the period. This will happen when the business reaches breaking point, exceeds breaking points, business numbers of units produced and sold in is the margin of safety. D1
There are a lot of limitations of a break-even analysis in the production of a car factory. All of the sold products became sales revenue as a break-even operating on the basis. In the fact of existence, All of the outputs sold imply that break-even works on the basis that all the way out turned into sales revenue. If they cannot work on the basis of purely in time, the companies will put the unsold items in an inventory, which can be taken anytime. Most businesses will sell more of their products at different prices in different markets and different customers and this connects to the idea of one product, one price. Customers who purchase in bulk, for example, will be worthy for a discount. The breakeven analysis will avoid all economies of scale. If the department is forced to accept lower prices with a higher output, simply because the market is content, then the curve of revenue will not be a straight line. Similarly, the average variable cost of the company is likely to be lower at higher outputs, as it can bargain a discount from their suppliers. The “straight line” assumption also means that the semi-variable costs are affected to be directly proportional to the output, and are simply combined with other variable costs. So the term semi-variable is not used at all. In addition, the business world is active and changing so any increase in production and any change in the cost are likely to affect the price levels. The break-even is like a balance sheet, which displays little of the situation at a specific period. The growth in energy shortage, for example, will lead to some gain in both variable and fixed costs. Not all costs can be easily limited as fixed or variable costs. The result is no more detailed than the accuracy of the source data it is situated. Moreover, production also depends on the opportunity of finance, people and impact of management, willing to oppose the actions and others. For example, elaborate production may place undue pressure on the staff, and may require existing employees to work supplementary, so the change in the base cost. These analysis is to ignore the fact that competitors improvement their products or prices. LIMITATION
you may also like some related chapters:
Because they shared expenses that alternate in direct bulk to the quantity of output. Research and development, Sales representative salaries, Office supplies, Machine repair. 2) Automobile Production Ltd cost statement for last year
$ $
Direct Materials: Body panels plastics 970 855 Lead acid batteries 520 980 Automobile engine 4 324 650 Metals 2 992 344 Car seat material 905 890 Tires 596 700 Glass for wind shields 833 480 11 144 899 Direct Labor: Finishing Operatives wages 98 900 Wages for assembly line workers 25 378 124 278 PRIME COST 11 269 177
Production Overhead: Supervisor salary 30 300 Machine Depreciation 1 034 Research and Development 150 560 Sundry factory cost 1 245 Other factory cost 548 Factory Electricity cost 6 500 Machine repair 2 423 192 610 PRODUCTION COST 11 461 787
Other Overheads: Sales representative salaries 50 400 Office supplies 3 400 Corporate staff health care cost 10 950 Marketing cost 15 875 Office Electricity cost 1 230 Administrative cost 19 390 101 245 TOTAL COST 11 563 032
Selling price per unit for Automobile Production factory.
Fixed cost
Total Fixed cost
Variable cost
Variable cost
Sales volume (units)
Total variable ($7 850 x 1 000)
Total cost
Mark-up required on cost (11 555 920 x 25%)
Total Cost (including mark-up)
Selling price per unit
($14 444 900 / 1 000)
$
7 850
1 000 units
$
3 705 920
7 850 000
11 555 920
2 888 980
14 444 900
14 444.90
TASK 2
A) Break-even analysis for the automobile production factory. Break-even point (units)
= Total fixed cost ÷ Unit contribution
= 3 705 920 ÷ (14 444.90 – 7 850)
= 3 705 920 ÷ 6 594.90
= 561.9372545451789
= 562 Units
Break-even point (sales)
= Break-even point (units) x Sales per unit
= 562 units x 14 444.90
= $ 8 118 033.80
Margin of safety
= Sales volume – Break-even point (units)
= 1 000 – 562
= 438 units
Target profit of $ 7 900 000
Sales (units)
= $ 14 444.90 – $ 7 850 = $ 6 594.90
= (7 900 000 + 3 705 920) ÷ 6 594.90
= 11 605 920 ÷ 6 594.90
= 1 759.832597916572
= 1 760 units
Sales (dollars)
= 6 594.90 ÷ 14 444.90 = 0.4565
= (7 900 000 + 3 705 920) ÷ 0.4565
= 11 605 920 ÷ 0.4565
= $ 25 423 702.08
3486150234315001600200-114300Break-even chart
0Break-even chart
19431001028700BE point
00BE point
445770034290002811145788670002857500125730008115301669415008001001371600004686300800100Variable cost 00Variable cost
457200080010000
308610066040Margin of safety
0Margin of safety
194310066040Figure 1
0Figure 1
B) From the chart, the following Figure above is:
Breakeven point
Area of loss
Area of profit
Margin of safety
From the chart above is showing that total cost meet total revenue to see the BEP result. For this reason, the BEP unit are 562 units and BEP sales are $8 118 033.80. From the chart above, we can see the yellow shaded is area of loss and the red shaded is area of profit. The orange line is to express the length of Margin of safety. It shows that the volume by which sales can be decrease before the loss will be earn. Accordingly from the margin of safety, 1000 units minus 562 units equal to 438 units, so the margin of safety is 438 units.
M1
The function of this break-even point is to predict the exact amount of sales or profits is almost impossible due to many of our products (with varying amounts of profitability), a lot of customers (with different service requirements), and the interaction between price, promotion and the number of sold units. These and other factors will be complicate the break-even analysis which shown at the figure 1. With the analysis, occurrences will happen according to when the business reaches breaking point, exceeds the breaking point and when it is number of units produced and sold is in the margin of safety. These events that will be explained below will link to the different activity levels using the results of the breakeven analysis. Firstly, the business implications when it is unable to reach the breaking point are, automobile production factory shows that in the figure 1, which is break-even chart that the business is not to make a profit, if the business has not reached the break-even point. If it is below the breakeven point, the business owner will have to pay the loss by itself, otherwise, if the owner cannot pay for loss of business will be bankrupt or failed. From the evidence figure 1, below selling price of 562 units will not be able to get the profit. Example: $ (14 444.90 – 7 850) x 400 units = $ 2 637 960 (Total contribution) $ 3 705 920 (Total fixed cost)
$ 2 637 960 – $ 3 705 920 = $ (1 067 960) / Loss
Secondly, the business will have this effect when it exceeds the breaking point. When these factory revenues that will exceed the costs referred to profits and business owners can keep the profit as income or reinvest profits in the business to growth and the business owner can improve business by making new branches elsewhere. From the figure 1, break-even chart its show that the factory sells more than 562 units that can be exceed to gain much profit. Example: $ (14 444.90 – 7 850) x 800 units = $ 5 275 920 (Total contribution) $ 3 705 920 (Total fixed cost)
$ 5 275 920 – $ 3 705 920 = $ 1 570 000 / Profit
Thirdly, when the business numbers of units produced and sold is in the margin of safety is when the amounts by which the actual sales exceed the break-even sales. It represents the amount of drop in sales, which the company can tolerate. Higher margin of safety, especially as the company can resist variations in sales. A drop in sales in excess of margin of safety will cause a net loss for the period. Example: $ 3 705 920 ÷ (14 444.90 – 7 850) = 562 units (BEP) 800 – 562 = 238 units (margin of safety) In conclusion, these scenarios that are, when it is below the selling price 562 are will not get any profit which is loss & might be the business will be close or bankruptcy. When the business sells more than 562 units they will get more profit and can open more branches. When the business numbers units produced and sold is the margin of safety so the company can resist variations in sales, a drop in sales in excess of margin of safety will cause a net loss for the period. This will happen when the business reaches breaking point, exceeds breaking points, business numbers of units produced and sold in is the margin of safety. D1
There are a lot of limitations of a break-even analysis in the production of a car factory. All of the sold products became sales revenue as a break-even operating on the basis. In the fact of existence, All of the outputs sold imply that break-even works on the basis that all the way out turned into sales revenue. If they cannot work on the basis of purely in time, the companies will put the unsold items in an inventory, which can be taken anytime. Most businesses will sell more of their products at different prices in different markets and different customers and this connects to the idea of one product, one price. Customers who purchase in bulk, for example, will be worthy for a discount. The breakeven analysis will avoid all economies of scale. If the department is forced to accept lower prices with a higher output, simply because the market is content, then the curve of revenue will not be a straight line. Similarly, the average variable cost of the company is likely to be lower at higher outputs, as it can bargain a discount from their suppliers. The “straight line” assumption also means that the semi-variable costs are affected to be directly proportional to the output, and are simply combined with other variable costs. So the term semi-variable is not used at all. In addition, the business world is active and changing so any increase in production and any change in the cost are likely to affect the price levels. The break-even is like a balance sheet, which displays little of the situation at a specific period. The growth in energy shortage, for example, will lead to some gain in both variable and fixed costs. Not all costs can be easily limited as fixed or variable costs. The result is no more detailed than the accuracy of the source data it is situated. Moreover, production also depends on the opportunity of finance, people and impact of management, willing to oppose the actions and others. For example, elaborate production may place undue pressure on the staff, and may require existing employees to work supplementary, so the change in the base cost. These analysis is to ignore the fact that competitors improvement their products or prices. LIMITATION
you may also like some related chapters:
Limitation of breakeven analysis is that it does not take into account the
needs of the side problems and in this competitive world, the focus should
primarily on the demand, then the decision should be made whether the product
that the product or not. For example, if the break-even point of a particular
product is 150 units, and the company produces 200 units with the break-even
point, but the future demand for the product falls to 100 units than the entire
implementation of this analysis, it is useless. Fixed costs are assumed to be
constant regardless of the production, and to do this analysis, which can
sometimes lead to incorrect assessment as fixed costs are sometimes varies with
changes in production. This requires a separate department of people carry this
operation, leading to additional costs for the organization. If the company
does not focus on sales, but by focusing on the issues of adverse costs than it
can never grow it as a hired person who continues to think about how to reduce
personal expenses instead of thinking how to increase revenue streams. Lastly,
if complete data on the cost structure of the product is not available, than
there is no advantage of doing this analysis, as this will give the wrong
result. BE analysis looks very beneficial and is a very helpful tool for making
opinion. The break-even charts are concern for easy to organize and provide
managers with the instruction about the break-even estimations, the margin of
safety, and profit and loss at different levels of output. Month Costs BEP Unit
Profit/Loss Conclusion
January Selling price $40,000
Variable cost
$20,000
Total fixed cost
$10,000,000
Sales volume
2,000 units Unit contribution: $40,000 – $20,000 = $20,000 BEP unit:
$10,000,000/$20,000
= 500 units Total contribution:
$20,000 x 2,000 = $40,000,000
Profit:
$40,000,000 – $10,000,000
= $30,000,000 The calculation shows that is profit and break-even unit is insignificant. February
(Selling price increase) Selling price $60,000
Variable cost
$20,000
Total fixed cost
$10,000,000
Sales volume
2,000 units Unit contribution: $60,000 – $20,000 = $40,000 BEP unit:
$10,000,000/$40,000
= 250 units Total contribution:
$40,000 x 2,000 = $80,000,000
Profit:
$80,000,000 – $10,000,000
= $70,000,000 When to increase the selling price, it makes more profit and break-even point unit is getting less. March
(Selling price decrease) Selling price $20,000
Variable cost
$20,000
Total fixed cost
$10,000,000
Sales volume
2,000 units Unit contribution: $20,000 – $20,000 = $0,
BEP unit:
$10,000,000/$0
= 0 units Total contribution:
$0 x 2,000 = $0
Profit:
$0 – $10,000,000
= ($10,000,000) When the selling price is reduced, it does business is not making a profit and break-even point unit becomes more. April (Variable cost increase) Selling price $40,000
Variable cost
$38,000
Total fixed cost
$10,000,000
Sales volume
2,000 units Unit contribution: $40,000 – $38,000 = $2,000
BEP unit:
$10,000,000/$2,000
= 5,000 units Total contribution:
$2,000 x 2,000 = $4,000,000
Profit:
$4,000,000 – $10,000,000
= ($6,000,000) When it is increase in variable costs, profit decreases, and shows that it is a loss and break-even point unit becomes more. May
(Variable cost decrease) Selling price $40,000
Variable cost
$15,000
Total fixed cost
$10,000,000
Sales volume
2,000 units Unit contribution: $40,000 – $15,000 = $25,000 BEP unit:
$10,000,000/$25,000
= 400 units Total contribution:
$25,000 x 2,000 = $50,000,000
Profit:
$50,000,000 – $10,000,000
= $40,000,000 When variable costs decrease, it is making more profit and the break-even point unit is reduced. June
(Fixed cost increase) Selling price $40,000
Variable cost
$20,000
Total fixed cost
$50,000,000
Sales volume
2,000 units Unit contribution: $40,000 – $20,000 = $20,000 BEP unit:
$50,000,000/$20,000
= 1,000 units Total contribution:
$20,000 x 2,000 = $40,000,000
Profit:
$40,000,000 – $50,000,000
= ($10,000,000) When the fixed cost increase, it does not make a profit and break-even point unit becomes more. July
(Fixed cost decrease) Selling price $40,000
Variable cost
$20,000
Total fixed cost
$500,000
Sales volume
2,000 units Unit contribution: $40,000 – $20,000 = $20,000 BEP unit:
$500,000/$20,000
= 25 units Total contribution:
$20,000 x 2,000 = $40,000,000
Profit:
$40,000,000 – $500,000
= $39,500,000 When fixed costs are reduced, it makes more profit and break-even point unit is insignificant. Consequently, when the selling price increases than the business makes a profit but when the fixed cost and variable costs increase business than is not producing any profit. All businesses is about targeting to earn more profits, they make more profit than they usually increase the selling price, and try to reduce variable costs, fixed cost but we can not change anything, because the fixed costs remain the same price. Breakeven point unit when the unit is larger which means that the business is not making profit but if the break-even point arrangement is less there will be more profit.
January Selling price $40,000
Variable cost
$20,000
Total fixed cost
$10,000,000
Sales volume
2,000 units Unit contribution: $40,000 – $20,000 = $20,000 BEP unit:
$10,000,000/$20,000
= 500 units Total contribution:
$20,000 x 2,000 = $40,000,000
Profit:
$40,000,000 – $10,000,000
= $30,000,000 The calculation shows that is profit and break-even unit is insignificant. February
(Selling price increase) Selling price $60,000
Variable cost
$20,000
Total fixed cost
$10,000,000
Sales volume
2,000 units Unit contribution: $60,000 – $20,000 = $40,000 BEP unit:
$10,000,000/$40,000
= 250 units Total contribution:
$40,000 x 2,000 = $80,000,000
Profit:
$80,000,000 – $10,000,000
= $70,000,000 When to increase the selling price, it makes more profit and break-even point unit is getting less. March
(Selling price decrease) Selling price $20,000
Variable cost
$20,000
Total fixed cost
$10,000,000
Sales volume
2,000 units Unit contribution: $20,000 – $20,000 = $0,
BEP unit:
$10,000,000/$0
= 0 units Total contribution:
$0 x 2,000 = $0
Profit:
$0 – $10,000,000
= ($10,000,000) When the selling price is reduced, it does business is not making a profit and break-even point unit becomes more. April (Variable cost increase) Selling price $40,000
Variable cost
$38,000
Total fixed cost
$10,000,000
Sales volume
2,000 units Unit contribution: $40,000 – $38,000 = $2,000
BEP unit:
$10,000,000/$2,000
= 5,000 units Total contribution:
$2,000 x 2,000 = $4,000,000
Profit:
$4,000,000 – $10,000,000
= ($6,000,000) When it is increase in variable costs, profit decreases, and shows that it is a loss and break-even point unit becomes more. May
(Variable cost decrease) Selling price $40,000
Variable cost
$15,000
Total fixed cost
$10,000,000
Sales volume
2,000 units Unit contribution: $40,000 – $15,000 = $25,000 BEP unit:
$10,000,000/$25,000
= 400 units Total contribution:
$25,000 x 2,000 = $50,000,000
Profit:
$50,000,000 – $10,000,000
= $40,000,000 When variable costs decrease, it is making more profit and the break-even point unit is reduced. June
(Fixed cost increase) Selling price $40,000
Variable cost
$20,000
Total fixed cost
$50,000,000
Sales volume
2,000 units Unit contribution: $40,000 – $20,000 = $20,000 BEP unit:
$50,000,000/$20,000
= 1,000 units Total contribution:
$20,000 x 2,000 = $40,000,000
Profit:
$40,000,000 – $50,000,000
= ($10,000,000) When the fixed cost increase, it does not make a profit and break-even point unit becomes more. July
(Fixed cost decrease) Selling price $40,000
Variable cost
$20,000
Total fixed cost
$500,000
Sales volume
2,000 units Unit contribution: $40,000 – $20,000 = $20,000 BEP unit:
$500,000/$20,000
= 25 units Total contribution:
$20,000 x 2,000 = $40,000,000
Profit:
$40,000,000 – $500,000
= $39,500,000 When fixed costs are reduced, it makes more profit and break-even point unit is insignificant. Consequently, when the selling price increases than the business makes a profit but when the fixed cost and variable costs increase business than is not producing any profit. All businesses is about targeting to earn more profits, they make more profit than they usually increase the selling price, and try to reduce variable costs, fixed cost but we can not change anything, because the fixed costs remain the same price. Breakeven point unit when the unit is larger which means that the business is not making profit but if the break-even point arrangement is less there will be more profit.
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