Question

BREAKEVEN- PowerFull

PowerFull manufactures gel-cell batteries. These are rechargeable; made in various sizes and with various capacities.   They are used in lighted signs (exit signs for example) to power them when utility power is out. They are also used to power emergency lighting and in computer power backup appliances. Consider their popular 12 volt, 8 amp hour battery that sells for $36 each. Production of this battery has the following fixed and variable costs:

            Fixed costs (per year)                            Variable Costs per battery

            Interest on Mortgage     $25000              Plastic case                  $1.00

            Utilities                           18000              Plates (lead sulfide)       5.00

            Salaries of a fixed type 50000              Mfg. labor                       2.50

            Hazmat License                6000             Electrolyte gel               3.00

            Pollution permit             12000             Packaging                      .50

            Other fixed expense      10000              Inert ingredients             1.50   

                        Total fixed       $121000              Testing/Certification       3.50

                                                                        Promotion expense            .50

                                                                                    Total                $17.50

1. What is the annual breakeven production quantity (use above data, show work)?

2. If the quantity in #1 can be sold at $36 a battery, what revenue would be generated?

3. Management insists that $100000 more than fixed costs be earned (variable costs remain unchanged). How many batteries must be sold to achieve this goal (the selling price remains $36 each. Show your calculations)?

4. Keep the goal of $100000 above fixed costs. Total fixed costs remain at $121000. Price remains at $36.    However, manufacturing labor cost is expected to become $3.50 per battery (due to a minimum wage increase). What will become the new breakeven quantity?

5. What is the Contribution Margin Ratio (CMR), considering the information in (4) above?

6. Go back to the original data (No wage increase; No earnings goal). Assume only 7000 batteries are sold at a price of $36 each. What is the DOL (show your calculations)?

Answer 1

Answer:

#1.

Break Even Point=Fixed Cost/(Selling price- Variable cost)

Given the value of Fixed Cost=$121000, Selling Price =$36 and Variable Cost=$17.50.

Put the given values in formula we get

Break even point=121000/(36-17.50)=121000/18.50=6540 units.

#2.

Revenue at Break even point=6540*$36=$235,440.

#3.

If management insists that Total revenue should be 100,000 more than fixed costs then Quantity sold will be =(fixed cost+100000)/(Selling price-Variable Cost)

=(121000+100000)/(36-17.50)=221000/18.50=11945units.

#4.

If manufacturing labor cost increased by $1, from $2.50 to $3.50, then the variable cost will be increased from $17.50 to $18.50.

New quantity to earn $100000 profit

=(121000+100000)/(36-18.50)=221000/17.50= 12628 units.

New break even quantity=121000/17.50=6914 units.

#5.

Contribution margin ratio (with variable cost=$18.50)

=($36-$18.50)/$36=$17.50/36=0.48

#6.

DOL=Quantity*(Price-Variable cost)/Quantity*(Price-Variable cost)-Fixed cost=7000*(36-17.50)/7000*(36-17.50)-121000=129500/8500=15.23.