Question

Kelly Kneppy owns a company that manufactures and sells camping equipment and outdoor

gear. Kelly’s latest creation is the Bear-B-Gone, a tent constructed of Kevlar and reinforced steel

mesh that could theoretically protect campers (who hadn’t followed appropriate food storage

guidelines) from bear attacks. Kelly believes the Bear-B-Gone offers many of the same desirable

features as other tents on the market, and that this extreme safety feature will make it one of the

best-selling tents in short order.

Kelly can make the Bear-B-Gone with one of two available technologies. The first is a labor-

intensive process, that if chosen will require $600,000 per year in fixed overhead costs, and the

following in variable costs of production per unit: direct materials of $75, direct labor of $75,

and overhead of $20. The second technology is a more automated (machine-dependent) process,

that if chosen will require $2,000,000 per year in fixed overhead costs, and the following in

variable costs of production: direct materials of $75, direct labor of $5, and overhead of $60.

Kelly believes she can sell the tent for $200.

1) What is Kelly’s break-even point in units (and sales dollars) with the labor-intensive

production process? What is the break-even point in units (and sales dollars) with the

more automated process?

Answer 1

Labor intensive production process:

Break even point in units = Fixed cost / Contribution per unit

Contribution per unit = $200-75-75-20 = $30 per unit

Break even point in units = $600,000 / $30 = 20,000 units

Break even point in sales dollars = Fixed cost / contribution ratio

Contribution ratio = $30/200*100 = 15%

Break even point in sales dollars = $600,000 / 15% = $4,000,000

More automated process:

Contribution per unit = $200-75-5-60 = $60

Break even point in units = $2,000,000 / $60 = 33,333 units

Contribution ratio = $60/$200*100 = 30%

Break even point in sales dollars = $2,000,000 / 30% = $6,666,667