A company has the capacity to generate a revenue of $3,000,000 a year. The break

Question

A company has the capacity to generate a revenue of $3,000,000 a year. The break even revenue is $2,000,000 a year. From the breakeven point every $100 extra revenue generates $40 extra profit and every $100 decrease in revenue results in $40 extra loss. The costs consist of fixed cost , variable costs which are linear related to the revenue. 1-calculate the fix cost 2-calcualte the variable cost at revenue of $1,500,000 a year. The company decides to purchase another machine, which results in an increase of capacity to 4,000,000 a year. The fixed cost of this expansion is 200,000 a year, and the variable costs are 40$ for 100% revenue. The normal revenues is 4,000,000 a year, and the actual revenues is also $4,000,000. 3- calculate the breakeven point after the expansion. 4- calculate the full cost per dollar revenue after the expansion

Explanation / Answer

From the breakeven point every $100 extra revenue generates $40 extra profit .......... this statement meanings is that the company had a contribution margin of 40 / 100 = 0.40 and

variable cost = 1 - 0.40 = 0.60.

Question - 1 ......... Fixed cost

At break even sales, we have contribution = fixed cost. So .........

Fixed cost = Break even sales * contribution margin ratio = 2000,000 * 0.40 = 800,000

Question - 2 .......... Variable cost = 1500,000 * ( 1 - 0.40 ) = 900,000

After expansion .........  

Fixed cost = 800,000 + 200,000 = 1000,000

Variable cost ratio = 0.40 ....... ( ie $ 40 for $ 100 )

Contribution margin ratio = 1 - 0.40 = 0.60

Question - 3

Breakeven point = Fixed cost / CM ratio = 1000,000 / 0.60 =  1666666.67

Question - 4

Calculate the full cost per dollar = Total cost / Total revenue = 2600,000 / 4000,000 = 0.65

Total cost = Variable cost + Fixed cost = 4000,000 * 0.40 + 1000,000 = 2600,000

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