Engler Corporation manufactures specialized blades. Last year the company manufa

Question

Engler Corporation manufactures specialized blades. Last year the company manufactured and sold 25,000 blades. It can manufacture an additional 10,000 blades without adding new machinery and equipment (i.e. fixed costs). Its total estimated cost for the 25,000 units it made last year are as follows:

Direct Material (variable)

$250,000

Direct labor (variable)

$375,000

Manufacturing Overhead

     Variable portion

$62,500

      Fixed portion

$55,000

Selling and Administrative

      Variable portion

$50,000

      Fixed portion

$35,000

What is the break-even price for the blades this year (given a production forecast of 30,000 blades)?

Direct Material (variable)

$250,000

Direct labor (variable)

$375,000

Manufacturing Overhead

     Variable portion

$62,500

      Fixed portion

$55,000

Selling and Administrative

      Variable portion

$50,000

      Fixed portion

$35,000

Explanation / Answer

Variable cost per unit = Total variable costs / Number of units produced last year

= (Direct Material + Direct labor (variable) + Variable portion of manufacturing overhead + Variable portion of selling overhead) / 25,000

= ($250,000 + $375,000 + $62,500 + $50,000) / 25,000 = $29.50

Let Selling Price be X

So, Contribution per unit = Selling price per unit - Variable cost per unit = X - $29.50

Now, Total Fixed Costs = Fixed portion of manufacturing overhead + Fixed portion of Selling overhead

= $55,000 + $35,000 = $90,000

So, Breakeven point (units) = Fixed Costs / Contribution per unit

Breakeven point is given as 30,000 units (the forecast given)

So, 30,000 = $90,000 / (X - $29.50)

So, X - $29.50 = $90,000 / 30,000

So, X = $3 + $29.50 = $32.50

So, the Break even price is $32.50

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