AudioCables, Inc., Is Currently Manufacturing An AdapterExample of the Break-even Point - Analysis of Alternatives
Problem Data
It is necessary to find the alternative that generates the highest profit using the break-even analysis:
- Alternative 1
Fixed Costs (F): 14000
Variable Cost per Unit (V): 0.6
Selling Price per Unit (P): 1.3
Expected unit sales (U): 30000
- Alternative 2
Fixed Costs (F): 20000
Variable Cost per Unit (V): 0.75
Selling Price per Unit (P): 1.3
Expected unit sales (U): 50000
- Description
- AudioCables, Inc., Is Currently Manufacturing An AdapterAudioCables, Inc., is currently manufacturing an adapter that has a variable cost of $0.60 per unit and a selling price of $1.30 per unit. Fixed costs are $14,000. Current sales volume is 30,000 units. The firm can substantially improve the product quality by adding a new piece of equipment at an additional fixed cost of $6,000. Variable costs would increase to $0.75, but sales volume should jump to 50,000 units due to a higher-quality product. Should AudioCables buy the new equipment?
Solution
The following are the calculations and detailed graphs to obtain the best alternative according to the data provided:
Alternative 1:
a) Break-even point in units:
To calculate the break-even point in units for alternative 1 (BEPU) we will use the following formula:
According to the results, the company must sell 20000 units to break even (no profit or loss).
b) Break-even point in dollars:
To calculate the break-even point in dollars (BEP$), we will use the following formula:
The company must earn $26000 to break even (no profit or loss).
c) Profits Earned:
To calculate the profit obtained when 30000 units are sold, we will do the following:
As profits have a positive, this means that the company makes a profit of $7000.
Note: You can zoom the chart using the scroll wheel and move the view by dragging it with the mouse.
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