Question

A manufacturer produces three types of humidifiers. The retail price of Humidifier Regular (HR) is $60 with variable costs of $20. Humidifier Advanced (HA) sells for $200 for its advanced features. This model’s variable costs are $80. Humidifier Simple (HS) is a simplified version and only sells for $25 with variable costs of $15. The manufacturer has machines and facilities worth $320,000 annually. The sales data show that 1000 units of HR, 2000 units of HA, and 10,000 units of HS was sold last year. Calculate the break-even point of the firm. The firm has some idle capacity at these volumes, and chooses to cut the selling price of HR from $60 to $45, believing that its sales volume will rise from 1000 units to 2500 units. What is the revised break-even point?

Answer 1

At break even point, we have total cost equals to total revenue

Total costs = (20×1000) + (80×2000) + (15×10,000) + 320,000

= $650,000

Total revenue = (60×1000) + (200×2000) + (25×10,000)

= $710,000

Hence the breakeven point occurs at $650,000, that is the revenue needed for the firm to be at neither profit nor loss.

--- After altering selling price of HR to $45 and increasing the sold units to 2500, let's observe the change in total costs and revenue

Total costs = (20×2500) + (80×2000) + (15×10000) + 320,000

= $680,000

Total revenue = (45x2500) + (200x2000) + (25x10,000)

= $762,500

Hence the breakeven in this altered scenario occurs at $680,000. That is the revenue of the firm at which there is no profit or loss. But fortunately the revenue exceeds the costs, therefore there is a nett profit.

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