Question

Question 2 Multimake Limited is considering the launch of a new product. The variable costs (direct labour and materials) are estimated at $7 per unit. New fixed costs relating to the product are estimated at $350,000 per annum, and the sale price will be $12 per unit. Required (a) Define and calculate the 'break-even point' in units for the new product. (5 marks) (b) Further information reveals that sales of up to 50.000 units per annum will be made at $15 per unit but for sales to exceed 50,000 units the price will have to be $10 for all sales above 50,000 units. Calculate and explain the break-even point in units using the new data in (b) above. (5 marks) It has also been ascertained that, if sales exceed 50,000 units per annum, additional warehousing will be needed at an annual fixed cost of $80,000. Calculate and explain the break-even points using the data in (b) and (©) above. (10 marks) (TOTAL: 20 marks)

Answer 1

a) Break even point in units = 70000 units

Solution :

'Break even point ' means the situation where the total revenue and total cost will be equal. That means, the level of sales that results in no profit and no loss.

So break even point in units means that the number of units that company has to sell to result in no profit and no loss.

Break even point in units = total fixed cost / contribution margin per unit.

Contribution margin per unit = selling price per unit - variable cost per unit.

= $12 - $7 = $5

Break even point in units = $350000/$5 = 70000 units

b) break even point in units = 83334 units.

Solution :

Up-to 50000 units, the contribution margin per unit = $5

Above 50000 units, the contribution margin per unit = $3 ($10 - $7).

So, total contribution margin by selling 50000 units at the rate of $12 = $5 × 50000 = $250000.

Therefore, the remaining fixed cost that has to be covered by units above 50000 = $350000 - $250000 = $100000

Number of units that needs to be sold above 50000 = $100000/$3 = 33333.33 units.

As units can't be in decimals, it is taken as 33334 units.

Therefore,

Break even point in units = 50000 + 33334 = 83334 units.

c) break even point in units = 110000 units.

Solution :

Compared to (b) the only change is increase in fixed cost by $80000.

That means, the units above 50000 needs to cover this additional cost.

So, break even point in units above 50000 = ($100000 + $80000)/$3 = $180000/$3 = 60000 units.

Total break even point in units = 50000 + 60000 = 110000 units.