Question

You own a business that specializes in designing and producing roofs for houses in central Texas. Your annual costs include office rent of $14,400, salaries for four designing engineers of $240,000, design software costs of $12,000, and other overhead costs of $3,000. An average roof in this region is priced at $3,500. It costs $1,200 in raw material, $1,100 in labor, and $100 in other expenses (for example, purchasing building permits). What is the minimum number of roofs you need to sell to earn a profit? What can you do to reduce the break-even level of sales?

Answer 1

Among the given costs, Fixed costs are office rents, salaries, design and overhead costs. Total Fixed costs= 14400+240000+12000+3000= $269400. Remaining are variable costs and will depend on the number of Units.

Breakeven happens when Total Revenue= Fixed Costs+Variable costs. Let x be the number of units to be breakeven.

x*3500= 269400+x*(1200+1100+100)

x*3500= 269400+x*2400

x*1100= 269400

x= 244.91

So, a minimum of 245 roofs needs to be sold to earn a profit.

The breakeven level can be reduced either by increasing Price or by decreasing costs. The variable costs may be decreased by procuring the raw materials from another source or by achieving economies of scale. Price may also be increased if we have less competition.