Question

Gwanak Corporation manufactures desktop watches and sells them for 8,000 won(1 Won= 1), and currently has a monthly production capacity of 40,000 units, with a fixed cost of 20 million won. It costs 4,000 won to produce one desktop clock.

1. When producing and selling 5,000 units, what is the operating profit of the Gwanak Company?

2. Find a break-even point for the Gwanak company.

3. What would be the break-even point if the selling price had fallen to 7,500 won and the unit's fluctuation cost had been raised to 4,300 won due to rising raw material prices?

Answer 1

1)

Operating profit = Total sales - variable cost - fixed cost

Total sales = units sold * price per unit

= 5000 * 8000

= 40,000,000

Variable cost = 5000*4000 = 20,000,000

Operating profit=40,000,000-20,000,000-20,000,00 = 0 won

2)

Break even point = fixed cost / contribution

Contribution = selling price - variable cost

Contribution = 8000 - 4000 = 4000

Break even point = 20,000,000 / 4000 = 5,000 units

3)

Here contribution = 7500 - 4300 = 3200 won

Break even point = 20,000,000 / 3200 = $6250 units