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A Level Accounting (9706)•9706/13/O/N/23
Question 29 from 9706/13/O/N/23

Explanation

Break-even analysis via fixed costs and contribution margin Steps:

  • Compute original contribution margin (CM): 15,000/1,875units=15,000 / 1,875 units = 15,000/1,875units=8 per unit.
  • Determine original variable cost (VC): 12−12 - 12−8 = $4 per unit.
  • For target BEP of 1,500 units with unchanged CM of 8,requiredfixedcosts=1,500×8, required fixed costs = 1,500 × 8,requiredfixedcosts=1,500×8 = $12,000.
  • Test each option's new BEP using formula: BEP = fixed costs / (selling price - VC).

Why C is correct:

  • Reducing fixed costs to 12,000withunchangedCMof12,000 with unchanged CM of 12,000withunchangedCMof8 yields BEP = 12,000/12,000 / 12,000/8 = 1,500 units, matching the break-even formula exactly.

Why the others are wrong:

  • A: New CM = 12.50−12.50 - 12.50−4 = 8.50;BEP=8.50; BEP = 8.50;BEP=15,000 / $8.50 ≈ 1,765 units, exceeds target.
  • B: New CM = 12−12 - 12−11.50 = 0.50;BEP=0.50; BEP = 0.50;BEP=12,000 / $0.50 = 24,000 units, far exceeds target.
  • D: New CM = 12−12 - 12−10 = 2;BEP=2; BEP = 2;BEP=15,000 / $2 = 7,500 units, exceeds target.

Final answer: C

Topic: Costs and cost behaviour

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