Management accounting question

Patriciamc93

Hey just wondering if anybody could help me with this question:

The following are comparative income statements for orb technologies for 2007 and 2008

2007
Sales. 420,000
Costs. 440,000
____________
Loss 20000

2008
Sales 630000
Costs 590000
____________
Profit 40000

Calculate the following:
Breakeven level of sales.....


Even if some one could tell me how to get the fixed costs?! Just can't get my head around it!

hivizman

You need to assume that the selling price per unit, the variable costs per unit and the fixed costs are the same in both years.

The difference between the 2007 and 2008 sales is 210,000 and the difference between the 2007 and 2008 costs is 150,000. All of this difference must be variable costs, as fixed costs remain the same whatever the sales volume. So the variable costs associated with sales of 210,000 are 150,000. Note that sales in 2007 were 420,000 = 2 x 210,000, so variable costs in 2007 must have been 2 x 150,000 = 300,000, and fixed costs were 440,000 - 300,000 = 140,000. This is confirmed by the 2008 total costs. Sales in 2008 were 630,000 = 3 x 210,000, so variable costs were 3 x 150,000 = 450,000. Adding the fixed costs of 140,000 gives total costs of 590,000.

The contribution (sales revenue less variable costs) for sales of 210,000 is 210,000 - 150,000 = 60,000. So 1 unit of contribution is generated by sales of 210,000/60,000 = 3.5. To break even, the contribution must equal the fixed costs, so the break even point is when sales equal 3.5 x 140,000 = 490,000.

You can also determine the break even point by interpolation. An increase of sales from 420,000 to 630,000 turns a loss of 20,000 into a profit of 40,000, that is, it increases profit by 60,000. As the loss of 20,000 is 1/3 of this amount, the break even point is 420,000 + 1/3 x (630,000 - 420,000) = 420,000 + 1/3 x 210,000 = 420,000 + 70,000 = 490,000.

Patriciamc93

hivizman wrote: »

You need to assume that the selling price per unit, the variable costs per unit and the fixed costs are the same in both years.

The difference between the 2007 and 2008 sales is 210,000 and the difference between the 2007 and 2008 costs is 150,000. All of this difference must be variable costs, as fixed costs remain the same whatever the sales volume. So the variable costs associated with sales of 210,000 are 150,000. Note that sales in 2007 were 420,000 = 2 x 210,000, so variable costs in 2007 must have been 2 x 150,000 = 300,000, and fixed costs were 440,000 - 300,000 = 140,000. This is confirmed by the 2008 total costs. Sales in 2008 were 630,000 = 3 x 210,000, so variable costs were 3 x 150,000 = 450,000. Adding the fixed costs of 140,000 gives total costs of 590,000.

The contribution (sales revenue less variable costs) for sales of 210,000 is 210,000 - 150,000 = 60,000. So 1 unit of contribution is generated by sales of 210,000/60,000 = 3.5. To break even, the contribution must equal the fixed costs, so the break even point is when sales equal 3.5 x 140,000 = 490,000.

You can also determine the break even point by interpolation. An increase of sales from 420,000 to 630,000 turns a loss of 20,000 into a profit of 40,000, that is, it increases profit by 60,000. As the loss of 20,000 is 1/3 of this amount, the break even point is 420,000 + 1/3 x (630,000 - 420,000) = 420,000 + 1/3 x 210,000 = 420,000 + 70,000 = 490,000.

Thank you so much I spent a good two hours on it and couldn't figure it out!