The manufacturer of a product that has a variable cost of $2.50 perunit and tota
ID: 2433850 • Letter: T
Question
The manufacturer of a product that has a variable cost of $2.50 perunit and total fixedcost of $125,000 wants to determine the level of output necessaryto avoid losses.
a. What level of sales is necessary to break even if the product issold for $4.25? What will
be the manufacturer's profit or loss on the sales of 100,000units?
b. If fixed costs rise to $175,000, what is the new level of salesnecessary to break even?
c. If variable costs decline to $2.25 per unit, what is the newlevel of sales necessary to
break even?
d. If fixed costs were to increase to $175,000, while variablecosts declined to $2.25 per
unit, what is the new break-even level of sales?
e. If a major proportion of fixed costs were non cash(depreciation), would failure to achieve the break-even leve ofsales imply that the firm cannot pay its current obligations asthey come due? suppose $100,000 of the above fixed costs of$125,000 were depreciation expense. what level of sales would bethe cash break-even level of sales?
Explanation / Answer
VC pu = 2.50 FC = 125000a. Selling Price pu = SP pu = 4.25 SP pu - VC pu = COnt pu ie COnt pu = 4.25 - 2.50 = 1.75 At BEP, Break Even Qty* VCpu = FC as there is NoLoss & No Profit ie Q*2.50 = 125000 ie BEP = 125000/2.50 = 50,000 units
At 100,000 units, Profit = Cont pu * Q - FC = 1.75*100,000 -125,000 = 175000-125000 = $50,000
b. If FC = 175,000 what is new BEP At BEP, Break Even Qty* VCpu = FC as there is NoLoss & No Profit ie Q*2.50 = 175000 ie BEP = 175000/2.50 = 70,000 units
c. If VC pu = 2.25 Selling Price pu = SP pu = 4.25 SP pu - VC pu = COnt pu ie COnt pu = 4.25 - 2.25 = 2.00 At BEP, Break Even Qty* VCpu = FC as there is NoLoss & No Profit ie Q*2.00 = 125000 ie BEP = 125000/2.00 = 62,500 units
d. FC = 175000 & VCpu = 2.25, what is BEP COnt pu = 4.25 - 2.25 = 2.00 At BEP, Break Even Qty* VCpu = FC as there is NoLoss & No Profit ie Q*2.00 = 175000 ie BEP = 175000/2.00 = 87,500 units
e. If $100,000 id Deprecitaion, actual FC = 125000-100000 =25000 Selling Price pu = SP pu = 4.25 SP pu - VC pu = COnt pu ie COnt pu = 4.25 - 2.50 = 1.75 At BEP, Break Even Qty* VCpu = FC as there is NoLoss & No Profit ie Q*2.50 = 25000 ie BEP = 25000/2.50 = 12,500 units for Cash Break even ofSales
If Firm can't pay its actual FC of $25000 which will generateBreakeven sale sof 25000 units, it can be said that Firm can't payits current obligation. Also when Dep is applied in such case, itwill result in Net Loss.
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