ITPEC FE Morning April 2020 Question 78
Break-even point (BEP) is a point where total costs and total revenue are equal. The table below shows the fixed costs, price per unit, variable costs per unit, and BEP in units for Company A and Company B.
Which of the following is the appropriate combination of the fixed costs of Company A, and Company B?
Explanation
x = 40,000 and y = 48,000 — at the break-even point the contribution margin of every unit sold exactly covers the fixed costs.
Break-even units = fixed costs ÷ (price − variable cost per unit), so fixed costs = BEP units × contribution margin per unit.
- •Company A: x = 500 × (120 − 40) = 500 × 80 = 40,000
- •Company B: y = 600 × (140 − 60) = 600 × 80 = 48,000
Check: Company A sells 500 units for 500 × 120 = 60,000 and spends 40,000 + 500 × 40 = 60,000, so revenue equals total cost.
Answer (d)
Why not others:
- •(a) 20,000 and 36,000 — multiplies each BEP by the variable cost per unit (500 × 40, 600 × 60) instead of by the contribution margin
- •(b) 20,000 and 48,000 — makes that slip for Company A only
- •(c) 40,000 and 36,000 — makes that slip for Company B only
Key rule: Fixed costs are recovered only by the contribution margin (price minus variable cost) of each unit, so fixed costs = break-even quantity × unit contribution margin.
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