Question

Auto Rex Inc. makes luxury hampers for sale in a chain of star-class department stores. The following financial information is available:

• Wholesale price $80 per hamper
• Labor and material costs $15 per hamper
• Bought-in components $25 per hamper
• Overheads (Fixed Cost) $800,000 per year

Current output and sales are set at 30,000 hampers per year, though the firm has the capacity to produce 50,000 hampers per year. What is the break-even quantity of Auto Rex Inc. in one year of production?

Answer 1

ANSWER TO QUESTION

Break even point is a point at which total cost and total revenue are equal. There is no net loss/gain

It is calculated by dividing the fixed cost of production by the price per unit minus the variable costs of production.

BEP= fixed cost/ contribution per unit

Contribution per unit= price per unit - variable costs

In the given question

Price= $80

Variable costs= labour and material cost and bought in components cost. ie. $40

Fixed costs= $800000

Contribution per unit = $80 - $40= $40

Break even quantity = 800000/40 = 20000 hammers

Break even quantity = 20000

Statement

Sales value (20000* 80) = 1600000

(-) labour and material cost(20000*15) = 300000

(-) bought in components(20000*25) = 500000

Contribution = 800000

(-) fixed costs = 800000

No profit no loss