Breakeven Topic

System
System Posts: 100,534 🤖 Admin 🤖
edited June 18 in AAT student discussion
I come across a question, but I have never seen it
before in a text book.

The question says what would be the Percentage increase of direct labour before the break even is made.

I was wondering if any one understands this question?

Comments

  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Breakeven Topic

    Is it the term breakeven that you don't understand? The point where costs are covered but no profit is made.

    Or was it something else you didn't understand?
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Breakeven Topic

    I understand break even. It is just I do not understand what the question is asking for.

    It was in my skills test exam.

    The question states what percentage of direct labour can we increase before breakeven of 25 units.

    I worked out in previous tasks all the variable cost and selling price per unit, break even and margin of safety.

    Its just that question on the percentage increse of direct labour.

    I just did not understand what they were asking for.

  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Breakeven Topic

    I thought you would possibly understand what breakeven meant but I wasn't sure what you were asking until you clarified it.

    Without the whole question it's difficult to answer and I guess you can't post it if it's part of a live skills test!

    Annette
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Breakeven Topic

    Roy
    As Annette has said you are asking for help on something that constitutes part of an individual assessment of your competence.

    Rather than use your question, I'll try to explain using an old exam question in the public arena.

    The data comes from the June 2007 paper question 2.1(a):-
      Price per unit £10
      Variable costs per unit
        Fuel £0.80 per unit
        Labour cost £0.50
        Variable overhead £0.60
        Total Fixed Costs £36,450

        Question 1         How many units must be sold to break even?
        I'm sure you know what to do
        1. Find Total variable cost per unit.
        2. Find Contribution per unit
        3. Divide Total fixed costs by contribution per unit to find the Break Even number of units.
        Total Variable cost per unit = £1.90
        Contribution per unit = £8.10
        Break even £36,450ccccccc= 4,500 units
        ccc£8.10ccc
      • System
        System Posts: 100,534 🤖 Admin 🤖
        Re:Breakeven Topic

        Additional data
        At a budgeted 10,000 units the business would produce a profit of £44,550

        Question 2.How much of an increase in the labour cost per unit would it take to turn a profit into just breaking even?

        this is called senstitivity analysis

        At 10,000 units the labour cost is 10,000 x £0.50 per unit = £5,000
        So if only wages were to increase, the labour cost would have to increase by the same value as the budgeted profit. £44,500.

        So if wages were £5,000 + £44,500 = £49,500, the profit would be wiped out and the business would be only breaking even.
        the £44,500 increase expressed as a % is
        £44,500cccccc= 890% increase
        c£5,000c

        I hope that helps with the principle without prejudicing the integrity of your work.

        sandy.hood@chichester.ac.uk
      • System
        System Posts: 100,534 🤖 Admin 🤖
        Re:Breakeven Topic

        Thank you very much indeed.

        Funny enough I think I got the answer correct. In my mind I was thinking on the same lines but I worked it out in a different way.

        I divided the fixed cost by the number of units and used the new contribution per unit and subtracted from the selling price per unit which gave new variable cost per unit.

        Than I subtracted from the the other variable overheads leaving the new direct labour cost per unit.

        Than compared the old direct labour cost per unit as a percentage increase.

        I think in your example the percentage increase is 891%

        because its (49550-5000)/5000* 100

        which gives 891% increase

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