Question

X Company sells one product. The following are the accountant's price and cost estimates for 2020:

Selling Price	16.76
Direct Materials	4.51
Direct Labor (all varible)	2.56
Variable Overhead	3.81
Variable Selling and Administration	1.80
Fixed overhead	14700
Fixed Selling and Administration	12000

Unit sales in 2019 were 5,700; unit sales in 2020 are expected to be 5,300.

The accountant is uncertain about her $2.56 direct labor estimate. What must direct labor be in 2020 in order for X Company to breakeven (rounded to two decimal places)?

Answer 1

Under Break-even, total revenues are equal to total costs.

Variable costs per unit = Direct materials + Direct labor + Variable overhead + Variable selling and administration

Let direct labor cost be x.

Variable costs per unit = $4.51 + x + $3.81 + $1.8

= $10.12 + x

Fixed costs = Fixed overhead + Fixed Selling and Administration

= $14,700 + $12,000

= $26,700

Revenues = Variable costs + Fixed costs

(5,300 units * $16.76 per unit) = [5,300 units * ($10.12 + x)] + $26,700

$88,828 = $53,636 + (5,300 * x) + $26,700

5,300 * x = $8,492

x = $1.60

Direct labor per unit in 2020 = $1.6