Question

An electronics firm is currently manufacturing an item that has a variable cost of $ 0.50 per unit and a selling price of $ 1.00 per unit. Fixed costs are $ 14,000. The current volume is 30 comma 000 units. The firm can substantially improve product quality by adding a new piece of equipment at an additional fixed cost of $ 6,000. The variable cost would increase to $ 0.60​, but volume should jump to 50,000 units due to a​ higher-quality product.
Based on the given information, the decision should be to:
a. For Smithson Cutting, the break-even point in units?
b. For Smithson Cutting, the break-even point in dollars =?

Answer 1

Answer:

a) the break-even point in unit= 50, 000 units

b.) the break-even point in dollars = $50,000

Explanation:

The break even point in units is the minimum units of the product that the company should sell in order for it to make no profit or loss.  

At this units of sales, the sales revenue would produce a total contribution exactly equal to the fixed cost.

Break -even point in unit = General fixed cost/price  - variable cost

= 14,000 + 6000/(1-0.6)= 50,000  units

Break -even point (sales revenue) =General fixed cost/contribution sales ratio

Contribution sales ratio-= 1-0.6/1× 100= 40%

Break-even sales revenue= 14,000 + 6000/40%=$50,000

a) For Smithson Cutting, the break-even point in unit= 50, 000 units

b) For Smithson Cutting, the break-even point in dollars = $50,000

Profit before decision

Profit = (sales price - variable cost)× units - Fixed cost

= (1-0.5)×30000 - 14,000 = $1000

Profit after = 1- 0.60× 50,000 - 20,000= $0