Question

1. Able Co. manufacturers a single product which sells for $45 each and whose variable costs are $15 each. Fixed costs are $600,000 for the year. What is the break-even point in dollars? In Units?

2. If the owners in Problem 1 desire a profit of $90,000 for the year, how many units must they sell?

3. Using the information in Problem 1, if the fixed cost goes up to $960,000, but the variable cost is reduced to $13 per unit, what is the new break-even point in dollars? In Units? Would you prefer to be in the situation of Problem 1 or Problem 3? Defend your position.

Answer 1

1. Break even point = fixed cost / profit volume ratio

Profitvolume ratio = contribution/ sales *100

= $45-$15/$45 *100

= 66.66%

Break even point (in $) = $600000/66.66

= $900000

Break even point (in units ) = Fixed cost / contribution

= $600000/ $45-$15

= $600000/$30

= 20,000 units

2. Required sales ( in units ) = Fixed cost + desired profit / contribution

Contribution = sale price - variable cost = $30

Required sales units = $600000 + $90000/$30

   = 23,000 units

3. Break even point = $960000/$45-$13

= 30000 units

Break even sales = 30000*45

= $1350000

break even point is a position where the firm is in no profit - no loss position i.e zero profit .

Problem 1 position is prefarable as low break even sales can lead to higher profits as the sales increases .