Question

Two companies, Ghost and Phantom manufacture similar printer color cartridges. The following data for the two companies for the year 2020 are provided below:

Ghost ($)
Phantom ($)
Sales revenue
90,000
108,000
Total costs
63,000
72,000
Variable Costs
40 % of sales revenue
40%

Required:
Calculate the Break-Even Point (BEP) in dollars for each company. (6 Marks)
Calculate the percentage margin of safety for each company. (6 Marks)
If sales of the product in Ghost company are equal to 3,000 units, determine the BEP (in units), and present the Break-even chart. (7 marks)
In 2020, Phantom plans to increase the variable cost by $4 while the fixed cost and the selling price will remain constant. Calculate the number of units to be sold in order to earn the same profit as Ghost in 2020. (6 Marks)
Based on your answers to parts 1 and 2, Discuss which company has a safer financial position, and why. (5 Marks)

Answer 1

Part 1: Calculate Break-Even Point (BEP)

Formula: BEP = Fixed Costs / (Sales Price per Unit - Variable Costs per Unit)

For Ghost:

Fixed Costs = $63,000

Variable Costs per Unit = 40% of Sales Revenue = 0.4 * $90,000/3,000 units = $12

BEP = $63,000 / ($15 - $12) = 21,000 units

For Phantom:

Fixed Costs = $72,000

Variable Costs per Unit = 40% of Sales Revenue = 0.4 * $108,000/3,000 units = $14.40

BEP = $72,000 / ($16 - $14.40) = 24,000 units

Part 2: Calculate Margin of Safety

Formula: Margin of Safety = (Sales Revenue - BEP) / Sales Revenue

For Ghost:

Margin of Safety = ($90,000 - $63,000) / $90,000 = 30%

For Phantom:

Margin of Safety = ($108,000 - $72,000) / $108,000 = 33.33%

Part 3: Ghost BEP in Units

Given: Sales of Ghost = 3,000 units

Formula: BEP in Units = Fixed Costs / Contribution Margin per Unit

Contribution Margin per Unit = Sales Price per Unit - Variable Costs per Unit = $15 - $12 = $3

BEP in Units = $63,000 / $3 = 21,000 units

Part 4: Phantom's Units for Equal Profit

Formula: Profit = Sales Revenue - Total Costs

For Ghost:

Profit = $90,000 - $63,000 = $27,000

Since Phantom's fixed cost and selling price remain constant, we need to adjust the variable cost to achieve the same profit as Ghost.

New Variable Cost per Unit = New Total Costs - Fixed Costs / Sales Revenue

New Total Costs = $27,000 (Profit) + $72,000 (Fixed Costs) = $99,000

New Variable Cost per Unit = $99,000 - $72,000 / $108,000 = $18.40

New Contribution Margin per Unit = $16 - $18.40 = -$2.40

Since the contribution margin is negative, Phantom needs to sell more units to compensate for the increased variable cost.

Part 5: Financial Position

Phantom has a safer financial position due to a higher margin of safety (33.33% vs. 30%). A higher margin of safety indicates a greater buffer against unforeseen expenses or declines in sales revenue.