Computation of break-even point and preparation of CVP graph or break-even chart. Impact of change in variable and fixed cost.
Beta company sells blouses in Washington, USA. Blouses are imported from Pakistan and are sold to customers in Washington at a profit. Salespersons are paid basic salary plus a decent commission on sales made by them. Sales and expense data is given below:
|Selling price per blouse||$80.00|
|Variable expenses per blouse:|
|Annual fixed expenses:|
- Compute the number of units to be sold to break-even.
- Prepare a CVP graph (break-even chart) and show the break-even point on the graph.
- If the manage is paid a commission of $6 blouse (in addition to the salesperson’s commission), what will be the effect on company’s break-even point?
- As an alternative to (3) above, company is thinking to pay $6 commission to manager on each blouse sold in excess of break-even point. What will be the effect of these changes on the net operating income or loss of the Beta company if 23,500 blouses are sold in a year?
- Refer to the original data. What will be the break-even point of the company if commission is entirely eliminated and salaries are increased by $214,000? Should the company make this change?
(1) Calculation of break-even point:
Fixed expenses / Contribution margin per unit
$600,000 / $30
20,000 units × $80 = $1,600,000
(2) CVP graph or break-even chart:
(3) Break-even point if manager is also paid a commission of $6 per blouse sold:
The payment of a commission of $6 to manager will decrease the unit contribution margin and increase the number of units required to sell to break-even.
$600,000 / $24
Now the company requires 25000 units or $2,000,000 in sales just to break-even.
(4) Effect on net operating income or loss if manager is paid a commission of $6 on each blouse sold after break-even point:
|Sales (23,500 × $80)||$||1,880,000|
|Less variable expenses (23,500 × $50)||1,175,000|
|Less manager’s commission [(23,500 - 20,000) × 6]||21,000|
|Net operating income||84,000|
(5) Break-even point after elimination of commission and increase in salaries:
18,500 × $80 = $14,80,000
Fixed cost after change: $600,000 + 214,000 = 814,000
Unit contribution margin after change: $80 – $36 = $44
With the new system, Beta company will start making profits after selling $18,500 units but with the old system company needs to sell 20,000 units before making any profit. The change should, therefore, be implemented.