Question

12.4 (Break even point and operating leverage) King Inc. is a health wine company in China. The average selling price of its finished product is 38 Chinese Yuan Renminbi per bottle (500ml/ bottle). The variable cost of the same bottle of wine is RMB 15. King Inc. incurs fixed costs of RMB 175 million per year.

1. What is the break even point in bottles of health wine for the company?

2. What is the RMB sales volume the firm must achieve to reach the break even point?

3. What would the firm’s profit or loss at the following annual units of production sold: 5 million bottles? 8 million bottles? 10 million bottles?

Answer 1

Answer to Part 1.
Selling Price per bottle = RMB 38
Variable Cost per bottle = RMB 15
Fixed Cost = RMB 175 Million

Contribution Margin per bottle = Selling Price per bottle - Variable Cost per bottle
Contribution Margin per bottle = RMB 38 – RMB 15
Contribution Margin per bottle = RMB 23

Break Even Point (No. of Bottles) = Fixed Cost / Contribution Margin per bottle
Break Even Point (No. of Bottles) = RMB 175,000,000 / RMB 23
Break Even Point (No. of Bottles) = 7,608,695.65 or 7,608,696 Bottles

Answer to Part 2.
Break Even Point (RMB Sales) = Break Even Point (No. of Bottles) * Selling Price per bottle
Break Even Point (RMB Sales) = 7,608,696 * RMB 38
Break Even Point (RMB Sales) = RMB 289,130,434.78

Answer to Part 3.
Units sold: 5 Million Bottles
Profit (Loss) = Contribution Margin – Fixed Cost
Profit (Loss) = (RMB 23 * 5,000,000) – RMB 175,000,000
Profit (Loss) = RMB 115,000,000 - – RMB 175,000,000
Profit (Loss) = -RMB 60,000,000

Units sold: 8 Million Bottles
Profit (Loss) = Contribution Margin – Fixed Cost
Profit (Loss) = (RMB 23 * 8,000,000) – RMB 175,000,000
Profit (Loss) = RMB 184,000,000 – RMB 175,000,000
Profit (Loss) = RMB 9,000,000

Units sold: 10 Million Bottles
Profit (Loss) = Contribution Margin – Fixed Cost
Profit (Loss) = (RMB 23 * 20,000,000) – RMB 175,000,000
Profit (Loss) = RMB 230,000,000 - – RMB 175,000,000
Profit (Loss) = RMB 55,000,000