Calculation of BEP using contribution method –
Step – 1
Contribution Margin = Sales Price – Variable Cost = $100 - $90 = $10 per unit
Contribution Margin Ratio = Contribution per unit / Sales Price = $10 / $100 = 10%
Step - 2
Break-even point in Units = Fixed Cost / Contribution per unit
= $84,000 / $10 = 8400 Units
Step - 3
Break-even point in Sales $ = Break-even in Units x $100 = 8400 x $100 = $840,000
OR
Break-even point in Sales $ = Fixed Cost / Contribution Margin Ratio = $84000 / 10% = $840,000
Calculation of BEP using P/V ratio method –
Step – 1
Break-even point in Units = Fixed Cost / (Sales Price – Variable Cost) = $84,000 /($100 - $90) = $84,000
/ $10 = 8400 Units
Break-even point in Sales $ = Break-even in Units x $100 = 8400 x $100 = $840,000
Transfer price is $3,000 for each consulting day.
Profit mark up
Let us assume Cost as X
So, Profit
Transfer Price
$3000
$3000
X
X
Cost
So, Profit
Variable Cost (70%)
Fixed Cost (30%)
=
=
=
=
=
=
=
=
=
=
=
=
=
=
=
=
150%
X
1.5 X
Cost + Profit
X + 1.5 X
2.5 X
$3000 / 2.5
$1200
$1,200
1.5 X
1.5 x $1200
$1,800
$1,200 x 70%
$840
$1,200 x 30%
$360
Scenario i) – Every tem of the IT division is fully engaged during the 48 week period in providing
consultancy services to the external clients and that the IT division has no spare capacity of
consultancy teams to take up the textiles division assignment.
So, here transfer price
= Marginal Cost + Opportunity Cost
Here, we have to calculate opportunity cost which is the lost contribution
Opportunity Cost
= Fee Charged by the External Client – Variable Cost
= $3000 - $840
= $2160
Marginal Cost (Variable Cost)
= Variable Cost – Saving from Internal Work
= $840 – 150
= $690
Transfer Price
= $2160 + $ 690
= $2850 per consulting day per team
Scenario ii) – IT division will be able to spare only one team of consultants to provide services to the
textiles division during the 48 week period and all other teams are fully engaged in providing
services to external clients.
Opportunity cost will not levied on idle team. So, variable cost for internal work is $840 per day.
Second team is occupied, hence opportunity cost will levied. So, the charge for second team is $2850
per consulting day per team.
So, average of charges of both teams = ($840 + $ 2850) / 2 = $1845 per consulting day per team
Scenario iii) – A new external client has come forward to pay IT division a total fee of $1,632,000 for
engaging the services of two teams of consultants during the aforesaid period of 48 weeks.
New client offers a fee of
= $1,632,000
Duration (2 Teams x 5 days of 48 weeks) = 480
Fee per day
= $1,632,000 / 480
Variable Cost
Contribution
Fee for consulting day for internal work
Lost Contribution
Fee to be charged
=
=
=
=
=
=
=
$3,400
$840
$3,400 -$840
$2,560
$690
$2160
$2850 per consulting day per team
1) Use direct method to reapportion PQR Ltd.’s Service departments to its production
departments:
Service Dept.
HR
Maintenance
Design
Ratio
(4:5)
(7:8)
(3:1)
Total
Total
$5,00,000
$4,60,000
$7,00,000
Production Department
Machining
Finishing
$2,22,222.22
$2,77,777.78
$2,14,666.67
$2,45,333.33
$5,25,000.00
$1,75,000.00
$9,61,888.89
$6,98,111.11
2) Use Step-down method to reapportion the firm’s service department cost.
Particulars
Overhead
Cost of HR Department
Ratio (1:1:8:10)
Ratio (1:7:8)
Ratio (3:1)
Total
HR
$5,00,000
-$5,00,000
$0
Departments
Maintenance
Design
Machining
$4,60,000
$7,00,000 $25,000
-$4,85,000
$25,000
$30,313
-$7,55,313
$2,00,000
$2,12,188
$5,66,485
$9,78,672
Finishing
$2,50,000
$2,42,500
$1,88,828
$6,81,328