CMA Study Group

Dear Friends,

This is question raised up from the breakeven topic, and need you assistance if you can.

A Co is marketing  a new product. Fixed cost will be $ 800,000 for a production level of 75,000 units or less and $ 1,200,000 if the production exceeds the 75,000 units.

The variable cost ratio is 60% for the first 75,000 units. Variable cost will decrease to 50% of sales for units in excess of 75,000 units.  if the product expected to sell for $ 25 per unit, how many units must the Co. sell to break even?

a- 96,000

b- 120,000

c- 80,000

d- 110,000     (the correct answer) ....Why is (D)?

Thank you & best regards

Ashraf

------------------------------
Ashraf Mohammad CIA
Director/Manager
Salmeya
Kuwait
------------------------------

Interesting question. You will need to apply "differential or marginal analysis" to solve this question.

Use "x" for units over 75,000 and put in BE equation to solve.

That is:

BE units = Fixed Costs / Unit Contribution Margin (UCM)

OR

Fixed Costs $ = Break-even Sales $ (i.e. no profit or loss situation)

Thus:

1) UCM for 75,000 level = $25 x VC 60% = $10 UCM

2) UCM for >75,000 level = $25 x VC 50% = $12.5 UCM

$1,200,000 = $10 * 75,000 + $12.5 * X

=> 1,200,000 = 750,000 + 12.5x

=> 1,200,000 - 750,000 = 12.5x

=> $450,000 = 12.5x

Therefore x = 36,000

Hence total BE units: 75,000 + 36000 = 111,000 units.

You say solution is 110,000. I don't see flaw in my solution because if I reverse it:

=> 75,000 x $10 + 36,000 x $12.5

=> $750,000 + $450,000 = $1,200,000 BE Sales

So I believe there is a typo in the book you're reading but not sure so let's see if someone else helps.

Good luck!


Original Message:
Sent: 06-21-2015 08:18 AM
From: Ashraf Mohammad
Subject: CMA _Part 2_ Break Even question

Dear Friends,

This is question raised up from the breakeven topic, and need you assistance if you can.

A Co is marketing  a new product. Fixed cost will be $ 800,000 for a production level of 75,000 units or less and $ 1,200,000 if the production exceeds the 75,000 units.

The variable cost ratio is 60% for the first 75,000 units. Variable cost will decrease to 50% of sales for units in excess of 75,000 units.  if the product expected to sell for $ 25 per unit, how many units must the Co. sell to break even?

a- 96,000

b- 120,000

c- 80,000

d- 110,000     (the correct answer) ....Why is (D)?

Thank you & best regards

Ashraf

------------------------------
Ashraf Mohammad CIA
Director/Manager
Salmeya
Kuwait
------------------------------

Thank you Taimur, I don't know how it would be without your help !

Thank you my dear

------------------------------
Ashraf Mohammad CIA
Director/Manager
Salmeya
Kuwait
------------------------------


Original Message:
Sent: 06-21-2015 11:23 AM
From: Mohammad Taimur Sheikh
Subject: CMA _Part 2_ Break Even question

Interesting question. You will need to apply "differential or marginal analysis" to solve this question.

Use "x" for units over 75,000 and put in BE equation to solve.

That is:

BE units = Fixed Costs / Unit Contribution Margin (UCM)

OR

Fixed Costs $ = Break-even Sales $ (i.e. no profit or loss situation)

Thus:

1) UCM for 75,000 level = $25 x VC 60% = $10 UCM

2) UCM for >75,000 level = $25 x VC 50% = $12.5 UCM

$1,200,000 = $10 * 75,000 + $12.5 * X

=> 1,200,000 = 750,000 + 12.5x

=> 1,200,000 - 750,000 = 12.5x

=> $450,000 = 12.5x

Therefore x = 36,000

Hence total BE units: 75,000 + 36000 = 111,000 units.

You say solution is 110,000. I don't see flaw in my solution because if I reverse it:

=> 75,000 x $10 + 36,000 x $12.5

=> $750,000 + $450,000 = $1,200,000 BE Sales

So I believe there is a typo in the book you're reading but not sure so let's see if someone else helps.

Good luck!


Original Message:
Sent: 06-21-2015 08:18 AM
From: Ashraf Mohammad
Subject: CMA _Part 2_ Break Even question

Dear Friends,

This is question raised up from the breakeven topic, and need you assistance if you can.

A Co is marketing  a new product. Fixed cost will be $ 800,000 for a production level of 75,000 units or less and $ 1,200,000 if the production exceeds the 75,000 units.

The variable cost ratio is 60% for the first 75,000 units. Variable cost will decrease to 50% of sales for units in excess of 75,000 units.  if the product expected to sell for $ 25 per unit, how many units must the Co. sell to break even?

a- 96,000

b- 120,000

c- 80,000

d- 110,000     (the correct answer) ....Why is (D)?

Thank you & best regards

Ashraf

------------------------------
Ashraf Mohammad CIA
Director/Manager
Salmeya
Kuwait
------------------------------

Let me try to solve this.

At 75000 units capacity, the contribution would be 750000 which will not be able to met the fixed cost of 800000 at that level.

75000*25*40% = 750000

Hence the production shall be more than 75000. Now let us calculate backwards

At BE level Net profit/Loss shall be Zero.

Therefore, if the units at BE level is "X", then

1200000 + 25X*50% = 0

Solve X

X = 96000.

I am not sure if my answer is correct or not.

Thanks,

Lakshmy Varma
Accountant
Millennium Offshore Services
Ajman
United Arab Emirates
------------------------------


Original Message:
Sent: 06-22-2015 03:59 PM
From: Ashraf Mohammad
Subject: CMA _Part 2_ Break Even question

Thank you Taimur, I don't know how it would be without your help !

Thank you my dear

------------------------------
Ashraf Mohammad CIA
Director/Manager
Salmeya
Kuwait
------------------------------


Original Message:
Sent: 06-21-2015 11:23 AM
From: Mohammad Taimur Sheikh
Subject: CMA _Part 2_ Break Even question

Interesting question. You will need to apply "differential or marginal analysis" to solve this question.

Use "x" for units over 75,000 and put in BE equation to solve.

That is:

BE units = Fixed Costs / Unit Contribution Margin (UCM)

OR

Fixed Costs $ = Break-even Sales $ (i.e. no profit or loss situation)

Thus:

1) UCM for 75,000 level = $25 x VC 60% = $10 UCM

2) UCM for >75,000 level = $25 x VC 50% = $12.5 UCM

$1,200,000 = $10 * 75,000 + $12.5 * X

=> 1,200,000 = 750,000 + 12.5x

=> 1,200,000 - 750,000 = 12.5x

=> $450,000 = 12.5x

Therefore x = 36,000

Hence total BE units: 75,000 + 36000 = 111,000 units.

You say solution is 110,000. I don't see flaw in my solution because if I reverse it:

=> 75,000 x $10 + 36,000 x $12.5

=> $750,000 + $450,000 = $1,200,000 BE Sales

So I believe there is a typo in the book you're reading but not sure so let's see if someone else helps.

Good luck!


Original Message:
Sent: 06-21-2015 08:18 AM
From: Ashraf Mohammad
Subject: CMA _Part 2_ Break Even question

Dear Friends,

This is question raised up from the breakeven topic, and need you assistance if you can.

A Co is marketing  a new product. Fixed cost will be $ 800,000 for a production level of 75,000 units or less and $ 1,200,000 if the production exceeds the 75,000 units.

The variable cost ratio is 60% for the first 75,000 units. Variable cost will decrease to 50% of sales for units in excess of 75,000 units.  if the product expected to sell for $ 25 per unit, how many units must the Co. sell to break even?

a- 96,000

b- 120,000

c- 80,000

d- 110,000     (the correct answer) ....Why is (D)?

Thank you & best regards

Ashraf

------------------------------
Ashraf Mohammad CIA
Director/Manager
Salmeya
Kuwait
------------------------------

Sorry, there is a  mistake in my workings. Let me rework.

------------------------------
Lakshmy Varma
Accountant
Millennium Offshore Services
Ajman
United Arab Emirates
------------------------------


Original Message:
Sent: 06-23-2015 06:35 AM
From: Lakshmy Varma
Subject: CMA _Part 2_ Break Even question

Let me try to solve this.

At 75000 units capacity, the contribution would be 750000 which will not be able to met the fixed cost of 800000 at that level.

75000*25*40% = 750000

Hence the production shall be more than 75000. Now let us calculate backwards

At BE level Net profit/Loss shall be Zero.

Therefore, if the units at BE level is "X", then

1200000 + 25X*50% = 0

Solve X

X = 96000.

I am not sure if my answer is correct or not.

Thanks,

Lakshmy Varma
Accountant
Millennium Offshore Services
Ajman
United Arab Emirates
------------------------------


Original Message:
Sent: 06-22-2015 03:59 PM
From: Ashraf Mohammad
Subject: CMA _Part 2_ Break Even question

Thank you Taimur, I don't know how it would be without your help !

Thank you my dear

------------------------------
Ashraf Mohammad CIA
Director/Manager
Salmeya
Kuwait
------------------------------


Original Message:
Sent: 06-21-2015 11:23 AM
From: Mohammad Taimur Sheikh
Subject: CMA _Part 2_ Break Even question

Interesting question. You will need to apply "differential or marginal analysis" to solve this question.

Use "x" for units over 75,000 and put in BE equation to solve.

That is:

BE units = Fixed Costs / Unit Contribution Margin (UCM)

OR

Fixed Costs $ = Break-even Sales $ (i.e. no profit or loss situation)

Thus:

1) UCM for 75,000 level = $25 x VC 60% = $10 UCM

2) UCM for >75,000 level = $25 x VC 50% = $12.5 UCM

$1,200,000 = $10 * 75,000 + $12.5 * X

=> 1,200,000 = 750,000 + 12.5x

=> 1,200,000 - 750,000 = 12.5x

=> $450,000 = 12.5x

Therefore x = 36,000

Hence total BE units: 75,000 + 36000 = 111,000 units.

You say solution is 110,000. I don't see flaw in my solution because if I reverse it:

=> 75,000 x $10 + 36,000 x $12.5

=> $750,000 + $450,000 = $1,200,000 BE Sales

So I believe there is a typo in the book you're reading but not sure so let's see if someone else helps.

Good luck!


Original Message:
Sent: 06-21-2015 08:18 AM
From: Ashraf Mohammad
Subject: CMA _Part 2_ Break Even question

Dear Friends,

This is question raised up from the breakeven topic, and need you assistance if you can.

A Co is marketing  a new product. Fixed cost will be $ 800,000 for a production level of 75,000 units or less and $ 1,200,000 if the production exceeds the 75,000 units.

The variable cost ratio is 60% for the first 75,000 units. Variable cost will decrease to 50% of sales for units in excess of 75,000 units.  if the product expected to sell for $ 25 per unit, how many units must the Co. sell to break even?

a- 96,000

b- 120,000

c- 80,000

d- 110,000     (the correct answer) ....Why is (D)?

Thank you & best regards

Ashraf

------------------------------
Ashraf Mohammad CIA
Director/Manager
Salmeya
Kuwait
------------------------------

Dear Friends,

This is question raised up from the breakeven topic, and need you assistance if you can.

A Co is marketing  a new product. Fixed cost will be $ 800,000 for a production level of 75,000 units or less and $ 1,200,000 if the production exceeds the 75,000 units.

The variable cost ratio is 60% for the first 75,000 units. Variable cost will decrease to 50% of sales for units in excess of 75,000 units.  if the product expected to sell for $ 25 per unit, how many units must the Co. sell to break even?

a- 96,000

b- 120,000

c- 80,000

d- 110,000     (the correct answer) ....Why is (D)?

Thank you & best regards

Ashraf

------------------------------
Ashraf Mohammad CIA
Director/Manager
Salmeya
Kuwait
------------------------------