Question

ABC Company sells its product for $16.00 per item. The Fixed Costs of the company are $240,000 per year, and the Variable Cost per Item is $8.00. The management has been offered an opportunity to move into a smaller facility, which would lower the Fixed Costs to $200,000. However, the Variable Cost per item would actually increase to $9.00 at this new facility. Management had come to you for advice. Please calculate the Break Even units required for both of the above scenarios. Give these 2 numbers to Management. Then, give your recommendations to the management team as to whether they should move to the new facility or not.

Answer 1

Breakeven units for scenario 1 is 30,000 units and 28,571 units for scenario 2. I would recommend that management accepts the opportunity to move to a smaller facility as this will improve the company's profitability since the company can break even with a smaller number of units sold.

Step-by-step explanation:

The BEP which is the break even point is the point where the company's sales or revenue generated is equal to the cost incurred. As such, the BEP is the number of units that must be sold for the company to make neither a profit nor a loss.

Both sales and variable cost are dependent on the number of units sold.

The sales less the variable cost gives the contribution margin. The contribution margin less the fixed cost gives the net income.

Breakeven units required

Let the breakeven units required in both situations be x and y

Scenario 1

16x -8x - 240,000 = 0

8x = 240,000

x = 30,000 units

Scenario 2

16y - 9y - 200,000 = 0

7y = 200,000

y = 28,571 units

It means that the company would have to sell 30,000 units to breakeven where the fixed cost is $240,000 but would have to sell even less to break even if the opportunity to move to a smaller facility is accepted