Question

How do I get the Break even number of units when I am not given the fixed costs? The practice exam question given to us is Rosewood company sells wooden carvings for $300 each. The direct materials cost per unit is $160 and the direct labor is 2 hours at a rate of $26 per hour. Manufacturing overhead is applied on the basis of labor hours at a rate of $36 per hour. Rosewood makes and sells 1,000 units per period. How many units must Rosewood sell to breakeven? All of the formulas that I can find in the book or practice questions include the fixed costs. I thought that maybe I could use the overhead hours costs as fixed, but that doesn't give me the correct number. His answer key says it is 818 units. How did he get to this number?

Answer 1

Answer:

You are correct in assuming manufacturing overhead costs as fixed; but you might have erred in calculations somewhere.

Variable cost per unit:

Direct material cost = $160

Direct labor cost = 2 * $26 = $52

Total variable cost per unit = 160 + 52 = $212

Contribution per unit = Sale price - Variable cost per unit = 300 - 212 = $88 Per unit

Manufacturing overhead is applied on the basis of labor hours at a rate of $36 per hour. Rosewood makes and sells 1,000 units per period.

Total direct labor hours for 1,000 units = 1000 *2 = 2,000 DLH

Hence:

Total Manufacturing overhead = 2000 * 36 = $72,000

Break-even number of units = Fixed cost / Contribution per unit = 72000 / 88 = 818 units

Break-even number of units = 818