COURSE WORK CASE STUDY

Course Work case study



Course Work case study

Calculate the turnover that OIL would have needed to generate in 2010 to break even3 marks

In the month of January, OIL had sales revenue of $14,000. Its fixed costs for the month were $5,000 and its variable costs were $7,000. Breakeven point calculated based on total sales and costs:

Sales at the breakeven point = 5,000 (fixed costs) divided by [1 - (7,000 in variable costs / 14,000 in actual sales)] = 5,000 / 0.5 = 10,000

The company has to cover the $5,000 in fixed costs every month, and the ratio of variable costs to sales is 50% ($7,000 / $14,000), so when the company has sales of $10,000 for the month, it can cover the fixed costs of $5,000 and the variable costs of $5,000 (50% of $10,000).

The gross margin is 50%: (14,000 in sales - 7,000 in variable costs) / 14,000 in sales. If the company sells its product at $20 each, its gross margin per unit is $10. The company would have to sell 250 units per month to cover its fixed costs ($20 x 250 = $5,000), but this would not cover the variable costs.

By applying the formula for calculating the breakeven point based on the gross margin percentage, we have the following:

Breakeven point = $5,000 (fixed costs) / 0.50 (gross margin percentage) = $10,000.

The result is the same: the company must have sales of $10,000 to reach the breakeven point. Now, to determine how many units you have to sell, you could simply divide the sales amount needed to reach the breakeven point ($10,000) by the price per unit ($20 in this example) to arrive at 500 units per month.

Using the formula to calculate the breakeven point in terms of the number of units:

Breakeven point = $5,000 (fixed costs) / [$20 (unit price) - $10 (unit variable cost)] = $5,000 / $10 = 500 units

Calculate the effect of a 5% reduction in variable costs

Variable Costs

Costs which vary directly in proportion to change in a certain activity. For example, as number of units produced would increase so would be the direct material & labor costs. As sales increase so the sales commission which is based on certain percentage of sale says 5%. If a company wants to decrease its variable cost, it should start from reducing wastage as far as possible. Further decrease can be made through introduction of modern technology through size reduction ( as in printed circuits ), switching over to cheaper raw material (paperboard from garbage) or recycling to reduce waste to zero.

Calculate the effect on profits if turnover were increased by 5% and the variable costs remain at the percentage they were in 2010

There are certain costs which are partly fixed and partly variable. These can be described as semi-variable costs or semi-fixed cost or even mixed costs. All utility bills have a fixed factor and usage factor. One would receive a telephone bill even if not a single call was made ...