fixed cost is 40000 and variable cost are 60 percent of sales.
If sales decrease by 20 percent then what is break even point?
To find the break-even point, we need to know the total cost and the contribution margin. The contribution margin is the percentage of sales that remains after covering the variable costs. Here's how we can calculate it:
Step 1: Calculate the variable cost:
Variable Cost = 60% of Sales
Variable Cost = 0.6 * Sales
Step 2: Calculate the total cost:
Total Cost = Fixed Cost + Variable Cost
Given that the fixed cost is $40,000, the equation becomes:
Total Cost = $40,000 + 0.6 * Sales
Step 3: Calculate the contribution margin:
Contribution Margin = (Sales - Variable Cost) / Sales
Since the variable costs are 60% of sales, the equation becomes:
Contribution Margin = (Sales - 0.6 * Sales) / Sales
Contribution Margin = 0.4 * Sales / Sales
Contribution Margin = 0.4
Step 4: Calculate the break-even point:
Break-even point is the level of sales where the total cost equals the total revenue (i.e., contribution margin equals 1).
At break-even point: Total Cost = Total Revenue
Therefore: Total Cost = (Contribution Margin * Sales)
Plug in the values:
$40,000 + 0.6 * Sales = 0.4 * Sales
Step 5: Solve for the break-even sales:
0.6 * Sales - 0.4 * Sales = $40,000
0.2 * Sales = $40,000
Sales = $40,000 / 0.2
Sales = $200,000
Hence, the break-even point is $200,000 in sales.