Question

A company can manufacture a product with off-the-shelf hand tools. Fixed manufacturing costs are $1200 for tools and $1.60 manufacturing cost per unit. As an alternative, an automated manufacturing system will cost $13400 with a $0.65 manufacturing cost per unit. The annual anticipated volume is 4200 units. Determine the break-even point. (years)

Answer 1

Answer:

3.06 years

Explanation:

The break-even point is when the total revenue equals the total production costs. In case of the change in manufacturing plan, the break even point is when the additional fixed costs are equal to the savings from the reduced manufacturing costs

Total Manufacturing Costs

Opt 1: Hand Tool Method

Cost = 1.60$/unit*4200unit/year*xyear

Cost = $6720x

Opt 2: Automated System

Cost = 0.65$/unit*4200unit/year*xyear

Cost = $2730x

Additional Fixed Costs

Additional Fixed Cost = $13400 - $1200

Additional Fixed Cost = $12200

Break Even Point

Additional Fixed Cost = Opt 1 Manufacturing Cost - Opt 2 Manufacturing Cost

$12200 = $6720x - $2730x

12200 = 3990x

x = 3.06 years

Assumptions:

1. The annual volume is the same every year
2. The tools/system costs are a one time costs
3. No depreciation of the system has been considered
4. The manufacturing cost per unit is the same every year
5. There are no other additional costs/expenses