Question

Using the information below, the president of the company examines your figures and says, “There’s something strange here. Our fixed costs haven’t changed and you show greater total contribution margin if we add the new product, but you also show our break-even point going up. With greater contribution margin, the break-even point should go down, not up. You’ve made a mistake somewhere.” Explain to the president what has happened.

a) Contribution Income Statement ) Hawaiian Tahition Fantasy Total $ % $ $ 300000 1 5ooooo los 800poo loo 180.000 bo ooooo 20 280000 35 Less: Variable Excheuses Contribution Margin Less: Fised Cost 120000 40 100000 80 52000065 475800 144200 b) Breakeven Point in Dollars = Fixed Cost Contribution Margin Rates = 475800 - $ 732000 0.65 Margin of safety in Deher - Actual Sales - B.E-P in Collars = 800000- 732000 - $ 68000 Margin of safety in percent = 68000 x 100 = 8.5% 800000

Answer 1

The breakeven point may increase even if the contribution margin is increasing. This may happen if the company has multiple products (which in case their are three) and the contribution margin of one product is quite low, which in this case we can see that the contribution margin of samoan delight is quite low as compared to the other two products.

The breakeven point is the point of sale at which the company has no profit and has covered all its expenses. So as the expense of samoan delight product is quite high as compared to other products the the breakeven point will increase even if the contribution margin increases.

Increase in sales = (1,250,000 - 800,000)/800,000 which is 56.25%

increase in variable cost = (640,000-280,000)  / 280,000 which is 128.57 %

In totallity there is no mistake in the calculations. The contribution margin and sales have a positive relation. Hence it has increased. But wen we compare the percentage sales increase and percentage variable expense increase wee see that the variable cost has increased quite significantly whereas the sales has not increased that much. Which has led to an increase in breakeven point even when the contribution margin has increased.