Thursday, June 17, 2010

Fixed Cost Calculation Example Problem

Fixed Cost Calculation Example Problem

A company has variable cost of 80 million per year. These cost represent approsimately 75% of the total revenue. They will make 50,000 widgets estimated for next year.

A. What is the break-even point expressed in total revenue for the company?
B. What is the average daily revenue per widget produced necessary to break-even?

Accounting Answer:

The key to answering this accounting problem is that variable cost = total costs.

A.

If we have 80,000,000 of variable cost which is equivalent to 75% of total revenues the next step will be finding out the break-even point in terms of each sale simply devide the 80M to 75% and we get the total revenue amounting to 106.67M.

Multiply the total revenue to 25% which is the resulting difference of 100% and 75% you get the Contribution Margin amounting to 26.67M.

 BES= CM - Fixed Cost where profit is equivalent to zero. So your BES = 26.67M

Break Even Sale Point is 26.67M

B.

 Average daily sale per widget for the company to break-even is equal to 533

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