Breakeven, Avoidable Fixed Costs, Price, CVP Assumptions, Operating Risk - King
This question calls for a breakeven calculation, which means that the cost function must
first be determined.
Costs are categorized as shown in the following table.
are assumed to be variable because employees work only as needed.
is assumed to be fixed because there is no information to suggest that this cost varies
proportionately with volume of activity.
If all variable costs vary with kilograms of salmon, then variable cost is estimated as:
$560,000/100,000 kgs. = $5.60 per kg.
The cost function is:
TC = $150,000 + $5.60 per kg.
If the selling price is the same as last year, it can estimated based on last year’s total
revenue and total volume:
Price = $800,000/100,000 kgs. = $8.00 per kg.
In this problem, it is best to calculate the breakeven in units because there is a limit on the
number of kilograms of salmon available:
0 = ($8.00 – $5.60)*Q - $150,000
$150,000 = $2.40*Q
Q = 62,500 kgs
The company cannot cover its fixed costs, because it cannot acquire enough salmon to