2. Preppy Co. makes and sells a single product. The current selling price is $30

Question

2. Preppy Co. makes and sells a single product. The current selling price is $30 per unit. Variable costs are $21 per unit, and fixed expenses total $90,000 per month. Sales volume for July totaled 12,000 units.

(a) Calculate the operating income for July.

(b) Calculate the break-even point in units sold and total revenues.

(c) Management is considering the use of automated production equipment. If this were done, variable costs would drop to $15.00 per unit, but fixed expenses would increase to $100,000 per month.
(1.) Calculate operating income at a volume of 12,000 units per month with the new cost structure.
(2.) Calculate the break-even point in units with the new cost structure.

Explanation / Answer

(a)   Sales = 30*12000 = 360000

(Less) variable costs = 21*12000 = 252000

(Less) fixed costs = 90000

Operating income = $18000

(b)   Break even point in units be X

X*30 = X*21 + 90000

9X = 90000

X = 10000 units

Break even point in dollars = 10000*30 = 300000

(c)   (i) Sales = 30*12000 = 360000

(Less) variable costs = 15*12000 = 180000

(Less) fixed costs = 100000

Operating income = $80000

(c ) (ii) Break even point in units be X

X*30 = X*15 + 100000

15X = 100000

Solving for X = 6667 units

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