Kleber Enterprises would like to evaluate three accounting software productsBreak-even Point Example - Cost Analysis

Problem Data

It is necessary to find the alternative that generates the lowest cost using the break-even analysis:

Alternative 1

Fixed Costs (F): 200000

Variable Cost per Unit (V): 60

Alternative 2

Fixed Costs (F): 300000

Variable Cost per Unit (V): 25

Alternative 3

Fixed Costs (F): 400000

Variable Cost per Unit (V): 10

Description
Kleber Enterprises would like to evaluate three accounting software productsKleber Enterprises would like to evaluate three accounting software products (A, B, and C) to support changes in its internal accounting processes. The resulting processes will have cost structures similar to those shown in Figure 7.3 . The costs of the software for these processes are: Software A, TOTAL FIXED COST=$200,000, DOLLARS REQUIRED PER ACCOUNTING REPORT=$60, Software B, TOTAL FIXED COST=$300,000, DOLLARS REQUIRED PER ACCOUNTING REPORT=$25, Software C, TOTAL FIXED COST=$400,000, DOLLARS REQUIRED PER ACCOUNTING REPORT=$10. Solve for the crossover point for software A and B and then the crossover point for software B and C.

Solution

The following are the calculations and detailed graphs to obtain the least cost alternative based on the data provided:

Break-even Analysis of Alternatives:

To perform the cost analysis, we will calculate the break-even point by comparing the alternatives two by 2, applying the following formula:

Where:

  • BEPm-b: Break-even point in units of production between alternatives “m” and “b”
  • Fm: Fixed cost of alternative “m”
  • CFb: Fixed cost of alternative “b”
  • CVUm: Variable cost per unit of alternative “m”
  • CVUb: Variable cost per unit of alternative “b”

The result must be a positive value. In case we have a different result, we will analyze as follows:

  • If the result is zero, it means that the fixed costs of both alternatives are equal, and the option with the lowest unit variable cost will always be the best alternative.
  • If the result is negative, the alternatives do not intersect to form a break-even point. The alternative with the lowest unit variable cost and the lowest fixed cost simultaneously will be the best option.
  • If the alternatives have the same unit variable cost, the break-even formula will not be applied, and the alternative with the lowest fixed cost will be the optimal one.

a) Break-even Point between Alternatives 1 and 2:

The break-even point in units of production of the alternatives 1 and 2 is 2857.143. When that amount is produced, both alternatives have the same cost of $371428.571.

b) Break-even Point between Alternatives 1 and 3:

The break-even point in units of production of the alternatives 1 and 3 is 4000. When that amount is produced, both alternatives have the same cost of $440000.

c) Break-even Point between Alternatives 2 and 3:

The break-even point in units of production of the alternatives 2 and 3 is 6666.667. When that amount is produced, both alternatives have the same cost of $466666.667.

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