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Thread: C/S Ratio to Break-Even

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    shunmas is offline Member (29-99 posts) shunmas is on a distinguished road
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    Default C/S Ratio to Break-Even

    Hello friends!

    Congratulate me for passing the challenging F2 exams with 63%. However, there was a question, which required C/S Ratio to break-even.

    The budgeted sales is 20,000 units and the selling price per unit is $35. The total fixed cost is 245,000. The MOS is 60% of Break-Even Sales. What is C/S Ratio required to break-even?

    Your help would be highly appreciated...Thanks!

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    M.Taseer (28-05-11)

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    Dagabie is offline Member (29-99 posts) Dagabie is on a distinguished road
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    What do you mean by MOS?
    AKAASA

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    Acid is offline Member Acid is on a distinguished road
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    Default

    Quote Originally Posted by Dagabie View Post
    What do you mean by MOS?
    By MOS he means Margin of Safety.

    Regards

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    Dagabie is offline Member (29-99 posts) Dagabie is on a distinguished road
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    The variable costs are not stated in the question.

    Calculation of break-even sales:

    At an output of 20,000units @ $35.00 selling price.

    Fixed costs remain unchanged at $245,000.

    The percentage (60%) margin of safety(MOS) = sales - break-even sales / sales x 100

    Therefore 60% = (20,000units x $35 = $700,000) - b.e.s / $700,000 x 100

    60% = $700,000 - b.e.s / $700,000 x 100

    60% / 100 = $700,000 - b.e.s / $700,000

    60% / 100 x $700,000 = $700,000 - b.e.s

    $420,000 = $700,000 - b.e.s

    b.e.s = $700,000 - $420,000

    break-even sales = $280,000 (units = $280,000 / $35.00 = 8,000)

    Contribution to sales ratio = sales - variable costs / sales x 100%

    = $280,000 - $245,000 / $280,000 x 100%

    =$35,000 / $280,000

    = 12.50%
    AKAASA

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    Nancy is offline Author Nancy is on a distinguished road
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    Lightbulb MOS

    Hi

    Although your calculation of BEP sales is correct, you have made a small mistake in the calculation of C/S ratio.

    The MOS ratio is 60%. Hence the BEP is bound to be 40% since at any given point MOS = Total budgeted sales - BEP sales.

    Now we can calculate the BEP sales as follows
    Budgeted sales x 40% = 20,000 units x 40% = 8,000 units
    BEP sales in value will be = 8000 units x $35 = $280,000
    Applying the rule - at BEP fixed costs are always equal to contribution we can calculate the C/S ratio as follows
    Contribution = fixed costs = $245,000 (fixed costs do not change at any given point)
    C/S ratio = Contribution/Sales at BEP x 100 = 2$45,000/$280,000 x 100 = 87.5%

    Now if you cross check then BEP = Fixed costs / c/s ratio = $245,000/87.5% = $280,000

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    abbas88waseem is offline New Member (0-29 posts) abbas88waseem is on a distinguished road
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    Default

    If we say that MOS is 60% of Breakeven sales then if we assume that breakeven sales are 100% and Budgeted sales are 160%.

    M.O.S. = Budgeted sales - Breakeven sales
    60% = 160% - 100%

    60% = 700000 - X
    _______________________________

    700000-----------160%

    X-----------------100%
    (cross multiplication......)

    X=700000*100/160=437500


    the formulae will be............


    breakeven sales = FOH / c/s ratio

    437500= 245000 / x

    x = 245000 / 437500

    x = 0.56

    c/s ratio = 0.56 * 100


    C/S RATIO = 56%

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    SandyHood is offline Member (29-99 posts) SandyHood is on a distinguished road
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    abbas88waseem

    I agree with your answer

    I did a similar calculation
    1. 20,000/1.6 = sales 12,500
    2. fixed cost = contribution, so 245,000/(35*12,500)
    3. 0.56 or 56%

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    Hymnody is offline New Member (0-29 posts) Hymnody is on a distinguished road
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    Default

    My answer would be the same as Nancy's 87.5%

    My computation goes like this,

    Sales = 20,000 x $35 = $700,000

    Formula: MOS = (Sales - BreakEvenSales) / Sales

    plugging in the given values..

    0.6 = (700,000 - BES) / 700,000

    Therefore, BES = 280,000

    Formula: Profit = (C/S) x Sales - Fixed Cost

    plugging in the values..

    0 = (C/S) x 280,000 - 245,000

    Hence, C/S = 0.875 or 87.5%

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    M.Taseer is offline New Member (0-29 posts) M.Taseer is on a distinguished road
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    Default

    Hey congrats....

    Plz tell us more about paper. which type of questions are there in exams...?

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