Question

Homecraft makes wooden play sets. the company pays annual rent of $400,000 per year and pays administrative salaries totaling $150,000 per year. each play set requires $400 of wood, ten hours of labor at $70 per hour, and variable overhead costs of $100. fixed advertising expenses equal $100,000 per year. each play set sells for $3,200. what is homecraft's break-even output level?

Answer 1

325
The break-even point is expressed as the equation F + nM <= nP where F = Fixed overhead M = Marginal cost per item P = Price per item n = number of items manufactured and sold So let's figure out the overhead and marginal costs. Rent of $400,000 per year - Fixed Admin salaries of $150,000 per year - Fixed Wood at $400 per play set - Marginal 10 hours of $70 labor per play set - Marginal Variable overhead costs of $100 per play set - Marginal Advertising of $100,000 per year - Fixed Fixed costs: $400,000 + $150,000 + $100,000 = $650,000 Marginal costs: $400 + 10 * $70 + $100 = $400 + $700 + $100 = $1,200 Now let's take the formula and solve for n, then plug in the known values and calculate. F + nM <= nP F <= nP - nM F <= n(P - M) F/(P - M) <= n $650,000/($3,200 - $1,200) <= n $650,000/$2,000 <= n 325 <= n So Homecraft has to produce and sell 325 play sets to break even.