Question 2 (35 marks): Th e two companies ABC and XYZ, that manufacture product

Question

Question 2 (35 marks): Th e two companies ABC and XYZ, that manufacture product P provided the following data for the year 2015: Values in $ Total costs Company ABCCompany XYZ 26,000 20,000 20% 26,000 20,000 30 % 1% Fixed costs | Required: Calculate the Break Even Point (BEP) (in revenues) of product P for each company.(20 marks) 1- 2- Calculate the percentage margin of safety for each company(8 marks). 3 Based on your answers to parts 1 and 2 above, which company has a safer financial position, and why?(7 marks) B292-MTA-VA

Explanation / Answer

ABC XYZ Total costs 20000 20000 % of fixed costs 20% 30% Total fixed costs 4000 6000 % of variable costs 80% 70% Total variable costs 16000 14000 Sales revenue 26000 26000 Varible cost 16000 14000 Contribution margin 10000 12000 Fixed costs 4000 6000 Net income 6000 6000 Contribution margin ratio Contribution/Sales*100 38.46% 46.15% (a) Breakeven point(Revenue) Fixed costs/Contribution margin ratio 10400 13000 (b) Margin of safety Net income/Contribution margin ratio 15600 13000 © You may see that Company has a lower Breakeven sales and higher Margin of safety than Company XYZ which means that the fixed costs of ABC are recovered quicker resulting in better profits than company XYZ. So, it is safer to invest in company ABC

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