Question

Breakeven Analysis

Your company is considering adding a new product. However, management wants more information regarding the potential profits and or losses from the proposed venture. The company manufactures aluminum cans. A large distillery wants your company to produce cans for its’ new product. The facts are as follows:

Selling price per can will be $ 1.35. A new production line will be added at a cost of $ 8,000 per year. Labor costs will be $ .25 cents per can and materials cost will be $.60 cents per can. Overhead costs will be 20% of the total company costs of $ 300,000 per year. Projected profit from the venture must be $ 40,000 for management to approve the project. The maximum number of cans the new line can produce is 150,000 units per year. Prepare a Breakeven Analysis for the project and answer the questions listed below.

Based on the preparation of your Breakeven analysis how many cans do you estimate must be produced in order to meet the above criteria.   _________________

Based on the above information should the company proceed with the project? Yes/No – Why/Why not

Answer 1

Selling Price = $ 1.35

Labour Cost = $ 0.25

Material Cost = $ 0.60

Gross Contribution Margin = 1.35 - 0.25 - 0.60 = $0.50

Overhead cost to be covered = $ 60,000 per year

Cost of production line = $8,000 per year

No of Cans to be produced every year = Total Fixed Cost/ Contribution Margin per unit

= $ 68000 / 0.50 = 1,36,000 units

Basis the above the company should only proceed with the project if the company gets the order of 136000 units/cans or more for every year.