Category: Business and Money > Accounting
Asked by: kissmark-ga
List Price: $10.00
13 Aug 2006 20:04 PDT
Expires: 12 Sep 2006 20:04 PDT
Question ID: 755689
Joy corporation manufactures and sells a single product; cordless telephones. joy is considering upgrading its current manufacturing facilities with more modern equipment. Relevant cost data under the current facility and the upgraded facility is provided below: current Upgraded Manufacturing costs: Direct materials cost per unit $20.00 $20.00 Direct labor cost per unit $18.00 $10.00 Variable overhead cost per unit $34.00 $24.00 Fixed overhead cost in total $43,000 $160,000 Selling and administrative expenses: Variable expense per unit $5.00 $5.00 Fixed expense in total $12,000 $12,000 Under either system, Joy will sell the cordless phones for $125 per phone. Questions: 1. What is the break-even point (in number of phones) of each option? 2. At what level of sales (in number of phones) will it start being more profitable for Joy to have the upgraded facilities?
Re: Break even-point
Answered By: gregaw-ga on 14 Aug 2006 06:02 PDT
Question #1 The break-even point for the current system is 1145.83 phones or 1146 phones, since you can't sell partial phones. Solution: Divide the fixed costs by the profit per phone: Per phone cost = $77 Profit per phone = $48 Fixed costs = $55,000 Break even point = 1145.83 or 1146 phones The break-even point for the upgraded system is 2606.06 phones or 2607, since you can't sell partial phones. Solution: Divide the fixed cost by the profit per phone: Per phone cost = $59 Profit per phone = $66 Fixed costs = 172,000 Break even point = 2606.06 or 2607 Question #2 After selling 6500 phones the two systems will be at the same profit level of $257,000. The upgrades system will begin to be MORE profitable when they sell 6501 phones. Solution: Divide the difference in fixed costs by the difference in profit. Difference is fixed costs = $117,000 Difference in profit per phone = $18 Number of phones for the two systems to be equil = 6500 Please let me know if you require any additional information or explaination by posting a request for clarification. Thanks!
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