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A company sells its products at Rs.15 per unit. In a period, if it produces and sells8000 units, it incurs a loss of Rs.5 per unit. If the volume is raised to20000 units, it earns a profi t of Rs.4 per unit. Calculate Break Even Point both in terms of rupees as well as units.
The Break Even point : Fixed Cost / Contribution per unit.
Here to calculate contribution per unit we need price and variable cost per unit. Price is Rs.15 and for variable cost per unit we will use high low method.
So total cost at8000 unit level : total sales +/- Loss/profit. here (8000*15)+(8000*5)=160000
So total cost at20000 unit level : total sales +/- Loss/profit. here (20000*15)-(20000*4)=220000
As per High low method: / =5
So5 is the variable cost per unit. the total fixed cost cost element will be calculated like this:
at8000 activity level : total cost - variable cost = fixed cost :160000- (8000*5) =120000
at8000 activity level : total cost - variable cost = fixed cost :220000- (20000*5) =120000
and contribution per unit will be : sales price - variable cost per unit :15-5=10
so10 is the contribution per unit.
Break Even point in terms of unit will be : total fixed cost / contribution per unit :120000/10 =12000 unit
Break Even point in terms of rupees will be : total fixed cost / contribution to sale ratio (CS ratio)
here Contribution to sale ratio :10/15*100 =66.6667 %
So Break Even point in terms of rupees will be :120000 /66.667 % =180000 Rupees.
Thanks for nice question
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