Smythe and Jones Ltd purveyors to the gentry create individual dumbwaiters. The

Question

Smythe and Jones Ltd purveyors to the gentry create individual dumbwaiters. The fixed costs of operating the workshop for a month total S3,000. Each dumbwaiter requires materials that cost S12. Each dumbwaiter takes three hours to complete, and the company pays the workers $18 per hour. The employees are paid as casuals so that if there is no work for them thev are not paid. The dumbwaiters are sold to a wholesaler for $75 each (i) CALCULATE the break-even quantity for making dumbwaiters for this business The company expects to sell 500 dumbwaiters per month. The business has the opportunity to rent a polishing machine for $7,000 per month. If the machine is used there is estimated to be associated extra costs (utilities and consumables) of $2 per dumbwaiter. Using the machine would reduce the labour time per dumbwaiter to 2 hours, but the casual workers would still paid at $18 per hour (ii) CALCULATE the break-even quantity for making dumbwaiters for this business.

Explanation / Answer

Answer 1)

Break even quantity (BEP)= Fixed cost / Contribution

Contribution (C)= Selling price per unit - variable cost per unit

Here, The variable cost per unit = Material cost per unit + labour cost paid = $ 12 + 3* $18 = $66

C = $ 75 - $ 66 = $ 9

BEP = $ 3000 /$9 = 333.333 units = 334 units of dumbwaiters per month

Answer 2)

In this case , Fixed cost = $ 3000 + $ 7000 = $10000

Variable cost per unit = material cost + Utilities & consumable cost + labour cost = $12 + $2+ 2*$18 = $ 50.

C = $ 75 - $ 50 = $ 20

BEP = $ 10,000 / $ 20 = 500 units per months.

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