Question

(A novelty company has fixed costs totaling $185,000. In the production of their main product the unit material cost is $3.20 and the unit labor cost is $6.00 per hour. The operators are able to produce 12 units per hour. The selling price is $8.25 per unit.
a. If the company is able to sell all the items it can produce, compute the Break Even (BE) quantity.
b. If the company produces 55,000 units, what is the breakeven sales quantity?
c. If the company wants an $80,000 profit, what quantity must they produce?

Answer 1

Answer:

a) = 40660 units

b) = $335,445

c) = 58242 units

Explanation:

Lets summarize the information first,

F.C = $185,000

Direct Material (DM) = $3.20

Direct Labor (DL) = $6.00/hr or 6/12 = $0.5/product

Selling Price (SP) = $8.25

For a)

Break Even qty = F.C/Contribution Margin (CM)

CM = SP - (DM +DL per product)  =  8.25 - (3.2 + 0.5)  =  $4.55

Break even qty = 185000 / 4.55  = 40659.3 or 40660 units

For b)

The break even qty does not change with sales so at 55000 units of sale the qty required for B.E is still 40660 units thus B.E Sales = 40660* 8.25

Break even sales = $335,445

For c)

This can be calculated by factoring target profit into the fixed costs so,

Quantity @ target profit = F.C + Target profit / C.M

So,

Quantity @ target profit = 185000 + 80000 / 4.55  =  58242 units rounded off.