Question

ABC Company is making a Widget that it plans to sell to its customers in Boston. This is a highly competitive market and there are many suppliers with a similar product.

ABC has asked that you determine the cost of their product and, help them with setting a price, and then determining the break-even and target profit points of operation.

ABC designed their operation (space and people) to be able make 150,000 units per year. The expectation is that for the next year or two they will make and sell about 30,000 units per year.

The following information was provided for costs:

1. Direct Material Costs for each Widget made are $1.40
2. Direct Labor Costs for each Widget made are $ .60
3. Operating Costs (all Fixed) are

Rent                                                    $40,000

Salaries                                             $180,000

Marketing and Advertising          $40,000

Insurance and Fees                        $10,000

Transportation & Other               $30,000

• What is the cost per unit for each Widget?
• What price should ABC company charge? How did you arrive at this price?
• How much will ABC make or lose at your price point if they sell 30,000 units?
• What is the break-even point for ABC at your price point?
• If ABC wants to make $100,000 profit how many widgets must be sold at your price point?

Answer 1

1) What is the cost per unit for each Widget?
Direct Material	$               1.40
Direct Labor	$               0.60
Cost per unit	$               2.00
2)
BEP Selling Price = Fixed cost/ volume + Variable cost per unit
BEP Selling Price = $300,000 /150,000 + 2	$               4.00
3)
Sales	$   1,20,000.00
Less: Variable Cost	$      60,000.00
Contribution Margin	$      60,000.00
Less: Fixed Cost	$   3,00,000.00
Net Operating loss	$ -2,40,000.00
4)
BEP = FC/ SP -VC
BEP = $300,000/(4 - 2)	1,50,000.00	Units
5)
BEP = FC + desired Profit /(SP - VC)
BEP = 300000+100000/(4-2)	2,00,000.00	Units