Lukas Manufacturing is currently producing a tape holderExample 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): 20000
Variable Cost per Unit (V): 0.75
Selling Price per Unit (P): 2
Expected unit sales (U): 40000
- Alternative 2
Fixed Costs (F): 25000
Variable Cost per Unit (V): 0.25
Selling Price per Unit (P): 2
Expected unit sales (U): 50000
- Description
- Lukas Manufacturing is currently producing a tape holderLukas Manufacturing is currently producing a tape holder that has a variable cost of $0.75 per unit and a selling price of $2.00 per unit. Fixed costs are $20,000 a year. Current volume is 40,000 units a year. The firm can produce a better product by adding a new piece of equipment to the process line. This equipment represents an increase of $5,000 per year in fixed costs. The variable cost would decrease to $0.25 per unit. The volume for the new and improved product should rise to 50,000 units a year. (a) Should the company invest in the new equipment? (b) At what volume does the equipment choice change? (c) At a volume of 15,000 units, which process should be used?
Solution
The following are the calculations and detailed graphs to obtain the best alternative according to the data provided:
Alternative 1:
a) Break-even point in units:
To calculate the break-even point in units for alternative 1 (BEPU) we will use the following formula:
According to the results, the company must sell 16000 units to break even (no profit or loss).
b) Break-even point in dollars:
To calculate the break-even point in dollars (BEP$), we will use the following formula:
The company must earn $32000 to break even (no profit or loss).
c) Profits Earned:
To calculate the profit obtained when 40000 units are sold, we will do the following:
As profits have a positive, this means that the company makes a profit of $30000.
Note: You can zoom the chart using the scroll wheel and move the view by dragging it with the mouse.
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