Question

9(B). Butters Corporation recently noticed an increase in its fixed cost. All other costs and

revenues were unchanged. What impact will this have on break-even point and the margin of safety (increase, decrease, or stay the same… and why? – feel free to make-up numbers to help explain why.

1. Breakeven: _________________ Why:_______________________________________________________________
2. Margin of Safety: _________________ Why:_______________________________________________________________

10. Chef Company makes and sells pre-packed lunches. The variable cost of each lunch is $5. The lunches are sold for $10 each. Fixed operating expenses amount to $10,000. Using the space below, prepare a break-even graph. Indicate the following on the graph: (a) fixed cost, (b) total cost, (c) total revenue, (d) loss, (e) breakeven point, and (f) profit area.

Answer 1

Answer to Question 9.

The Break even point will increase if Fixed Cost increases, while other revenue and Expenses remain unchanged.

Break even Point is the point where Net Income is zero, or fixed cost is equal to Contribution margin.

If other Revenue and expenses remains unchanged, the Contribution margin will remain unchanged and more units will be needed to cover the increased fixed cost with same Contribution margin.

Break even point = Fixed Cost / Contribution margin per unit

The Margin of safety will decrease as it is excess of Current Sales over Break even sales. If Fixed cost increases and other costs remains unchanged will increase Break Even Sales and it will in turn decrease Margin of Safety

Margin of Safety = Current Sales - Break Even Sales