Problem 2

The company MACARRONCHELLI SA produces only one product. We

know the following information:
 Contribution margin: €2.40
 Degree of Operating Leverage: 2.66 Profits (Benefit): €36,000
 Coverage Coefficient: 0.2

Using the given information:

a) Find the Total Cost.
b) Calculate the BeP (in units).

Before starting to solve the problem, we have to analyse the available information
and think about the formulas that we will need:

Contribution margin = p – VC* = 2.40€

𝑄 (𝑝−𝑉𝐶∗)𝑥 𝑄
DOL = 𝑄−𝐵𝑒𝑝 (𝑖𝑛 𝑢𝑛𝑖𝑡𝑠) = 2.66  DOL = (𝑝−𝑉𝐶∗)𝑥 𝑄−𝐹𝐶

Profits = TR – TC = 36,000€
𝑝−𝑉𝐶∗
CC = = 0,2
𝑝

Then, according to available information the relevant economic tools (formulas)

for the solution of the problem are:

𝑄 (𝑝−𝑉𝐶∗)𝑥 𝑄
DOL = 𝑄−𝐵𝑒𝑝 (𝑖𝑛 𝑢𝑛𝑖𝑡𝑠) = (𝑝−𝑉𝐶∗)𝑥 𝑄−𝐹𝐶

Total Revenue – Total costs = TR – TC = profits

𝑝−𝑉𝐶∗
CC = 𝑝

CM = p - VC*

VC = VC* x Q
𝐹𝐶
(𝑝−𝐶𝑉 ∗ )

A)
First of all, we use the formula of DOL, and we also know that (p-VC*) x Q – FC
is equal to the benefits. So, knowing that we can substitute 36,000 in the
denominator:
(𝑝−𝑉𝐶∗)𝑥 𝑄
DOL = = 2.66.
36,000
The following step is isolating the nominator: (p – VC*) x Q = 2.66 x 36,000 =
95,760. At this point, we have to figure out the quantity, in order to do that we
have to formulas that may help us:
(p-VC*) x Q = 2,40 x Q = 95,760.
95,760
Q= = 39,900 units.
2.40

How could we find the price? There is a formula that will provide us the solution,
this formula is the CC and we only have to isolate the price:
𝑝−𝑉𝐶∗ 2.4 2.4
CC = = 0,2  = 0.2  2.4 = 0.2 x p  0.2 = p = 12.
𝑝 𝑝

At this point, we are able to find out the revenue of the firm, we only have to
substitute the quantity and the price in the formula and the result will be 478,800€.
So, with all this data we can find the total cost using the benefits formula (B = TR
– TC) and substituting the benefits and the total income in it:
TC = TR – B = 478,800 – 36,000 = 442,800.

B)
Once we have all this information of the prior point, we want to know the variable
costs per unit. So, we can use the cost margin formula to discover it (we are going
to use the price and the contribution margin result):
CM = p - VC*  2.4 = 12 – VC*  VC* = 12-2.4 = 9.6
With the result we are able to know the variable total costs, we have to multiply
the quantity and the variable cost per unit:
VC = VC* x Q = 9.6 x 39,900 = 383,040€.
Thanks to the total costs and the variable costs we can know the fixed costs:
442,800 = FC + 383,040  FC= 59,760€.
The final step is to calculate the break-even point through all the data given in the
prior calculations:
𝐹𝐶 59,760
(𝑝−𝐶𝑉 ∗ )
= (12−9.6)= 24,900 units
Finally, we have found that the company has to sell an amount of 24,900 units
to have a benefit equal from 0. From this point, the company will star to have
benefits.

Problem 5
A clothing company had revenue of €4,400,000, CC of 0.6 and FC at 50%
of its revenue. Find the VC and the BeP of the company.

A)
First of all, to determine the VC and the BeP, we have to analyse the available
information, in this case we know:

Total revenue= 4,400,000€

CC= 0.6
FC= 50% of the company’s revenue = 2,200,000€

Next, according to available information the relevant economic tools (formulas) for the
solution of the problem are:

-TC (Total Cost) = FC (Fixed cost) + VC (Variable cost)

-The break-even point: TR (Total Revenue) = TC (Total Cost)
-Break-even point (BeP) in money = FC / CC

After analysing all the possible formulas that can help us, we know which ones
we have to use.

𝐹𝐶 2,200,000
Break-Even point (in money) = = = 3,666,666.67€
𝐶𝐶 0.6

Thanks to this formula, we have found that the company has to gain
3,666,666.67€ to start having benefits. We know this because we know that the
Break-even point is the quantity of money (in this case) in which the total costs
of the company and their total revenue are equal.

B)
After this, the exercise asks us to find out the amount of variable costs that the
company has. So, at this point we know that the fixed costs are 2,200,000€. If
the total revenue is equal to 4,400,000 and the fixed costs are 2,200,000 the
difference would be the amount of variable costs that the company will have:

4,400,000 – 2,200,000 = 2,200,000€

At the end, we have found that the company’s variable costs are 2,200,000€