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Question: 1. Breakeven Point When Price Is Independent of Demand An …

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1. Breakeven Point When Price Is Independent of Demand An engineering consulting rm measures its
output in a standard service hour unit, which is a function of the personnel grade levels in the professional
staff. The variable cost (cv) is $62 per standard service hour. The charge-out rate [i.e., selling price (p)] is
$85.56 per hour. The maximum output of the rm is 160,000 hours per year, and its xed cost (FC) is
$2,024,000 per year. For this rm:
what is the breakeven point in standard service hours and in percentage of total capacity?
what is the percentage reduction in the breakeven point (sensitivity) if xed costs are reduced 10%; if
variable cost per hour is reduced 10%; and if the selling price per unit is increased by 10%?

Expert Answer

Akhil Mittal answered this

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# Break even point ( in hrs) = 85908•32 hrs

Explanation-----

✓BEP( units) =total xed cost(TFC) /contribution per unit (CPU)

✓TFC=$2024000( given), CPU = sales price( SP)- variable cost (VC)

✓ CPU= 85•56--62= 23•56$

✓ hence BEP( hrs)= 2024000/23•56=85908•32 hrs.

# Break even point in percentage of total capacity =53•69%

Explanation-----

Maximum output capacity = 160000 hrs p.a ( given)

BEP ( hrs) = 85908•32

= (85908•42/160000)×100= 53•69%

# Percentage reduction in BEP= 44•67%

Explanation-----

✓ TFC( after reducing by 10%) = 2024000-10%of 2024000= 1821600 hrs

✓ VC p/h ( after Reducing by 10%)= 62-6•2= 55•8$

✓SP p/u ( after increasing by 10%)= 85•56+10%of 85•56= 94•12$

✓ BEP( in hrs ,after various changes)= 1821600/(94•12--55•8)= 47536•53 hrs.

✓ % Reduction in BEP ={( initial BEP - After change BEP)/initial BEP}×100

{(85908•32--47536•53)/85908•32}×100

=44•67%
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