Answer to Question #256993 in Economics of Enterprise for moatasem

Question

Wilson Partners manufactures thermocouples for electronics applications. The current system has a fixed cost of $300,000 per year, has a variable cost of $10 per unit, and sells for $14 per unit. A newly proposed process will add on-board features that allow the revenue to increase to $16 per unit, but the fixed cost will now be $500,000 per year. The variable cost will be based on a $48 per hour rate with 0.2 hour dedicated to produce each unit. Determine the annual breakeven quantity for the (a) Current system and (b) the new system. (b) Plot the two profit relations and estimate graphically the breakeven quantity between the two alternatives. (c) Mathematically determine the breakeven quantity between the two alternatives and compare it with the graphical estimate.

Answer 1

Break even point = fixed cost $÷$ contribution per unit 

•Contribution per unit = selling price per unit - variable cost per unit

Break even point for current system:

Selling price per unit          14

Less: variable cost per unit     10

= Contribution per unit.        4

 

Break even point $=\frac{300000}{4}=75000$

Break even point for new system:

Selling price per unit         16

Less: variable cost per unit    9.6

$(48 × 0.2) = 6.4$

 

Break even point $\frac {500,000} {6.4} = 78,125 units$