Question

A small business company is considering updating the current production line. There are two plans. For plan A, the fixed cost will be $42,000 and the variable cost will be $29 per unit after the update. For plan B, the fixed costs will be $44,000 and the variable cost will be $28 per unit after the update. Please answer the following questions:

(a) Suppose the selling price is $50, what is the break-even volume for each plan? Which plan has a lower break-even volume?

(b) Suppose the selling price is $50. Also, the company aims to achieve a profit of $21,000 after the update. What selling volume will be required to achieve the profit for each plan? Which plan has a lower volume?

Please provide steps

Answer 1

a)

For Plan A -

Fixed Cost = 42000

Variable Cost = 29 per unit

Selling Price = 50 per unit

Break Even Point = Fixed Cost / (Selling Price - Variable Cost)

BEP = 42000/(50-29)

BEP = 42000/21

BEP = 2000 units

For Plan B -

Fixed Cost = 44000

Variable Cost = 28 per unit

Selling Price = 50 per unit

BEP = 44000/(50-28)

BEP = 44000/22

BEP = 2000 units

BEP is equal for both the plans.

b)

Desired Profit = 21000

Sales Volume = (Fixed Cost+Desired Profit)/(Selling Price-Variable Cost)

For Plan A -

BEP = (42000+21000)/(50-29)

BEP = 63000/21

BEP = 3000 units

For Plan B -

BEP = (44000+21000)/(50-28)

BEP = 65000/22

BEP = 2954.55 units

BEP = 2955 units

Plan B has the lower volume