Break-even price for the company
At Break-even point,
Total revenue = Total costs and therefore profit =0
Break-even sales (BEP) in units= 50000
BEP=
Fixed costs= 100000+125000+50000
= $275,000
50000=
50000CM=275,000
CM= 275000/50000
= 5.5
Contribution margin= 5.5
BEP in shillings:
=
CMR= ×100
Selling price= contribution margin + variable costs
= 5.5+4.25+2.25
= $12
CMR= ×100
= 45.8333%
BEP in shillings=
= $600,000
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Maximum amount the company can pay for the training program in order to break-even.
Margin of safety (MOS) = 158088
Effect of additional training:
Variable manufacturing costs decreases by 0.75
Sales units increase by 20%
MOS= total sales- breakeven sales
Increase in sales = 20% ×50000
= 10,000 units
New variable manufacturing costs:
= 4.25-0.75
= $3.5
Revenue increase:
= (0.75×50000) + 10000[12-(3.5+2.25)
= 37500+62500
= $100000
At BEP; contribution-fixed costs=0
Therefore maximum amount to pay for the training program;
= revenue increase + margin of safety
= $100000+ $158088
= $258,