Question

You company is in the business of making computer monitors. Through a market survey, the company has identified a demand for a new computer monitor product and has also determined that the market would bear a unit price of $207. To manufacture this new product, however, the company will need to invest in a new production assembly line. You are asked by your boss to consider two options of production assembly lines.

• Option #1: A labor-intensive process which has a fixed cost of $348,000 and a variable cost of $153 per monitor.

• Option #2: A highly automated process (capital intensive) that has a fixed costs of $1,264,000 and a variable cost of $94.5 per monitor.

Your job is to figure out how many computer monitors the company has to produce (and sell) to justify the high cost of initial investment for Option #1.

Answer 1

Company needs to produce and sell at least that amount of product which covers higher fixed cost.

The break even point is the point where company is able to recover its fixed cost

Formula = Fixed cost / Contribution per unit.

Fixed cost = $348000

Contribution per unit = Total sale price - Total variable cost

= $207 - $153

= $54

Minimum units of production = $348000 / 54 = 6445 units of computer monitor.

Company needs to produce 6445 units of computer monitor to justify the higher cost of option 1 and to earn the profit company needs to produce and sell moire than 6445 units.