C/S Ratio to Break-Even

[shunmas]

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!

[Dagabie]

What do you mean by MOS?

[Acid]

What do you mean by MOS?

By MOS he means Margin of Safety.

Regards

[Dagabie]

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%

[Nancy]

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

[abbas88waseem]

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%

[SandyHood]

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%

[Hymnody]

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%

[M.Taseer]

Hey congrats....

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