Question

A manufacturing process has a fixed cost of $300,000 per month. Each unit of product being produced contains $160 worth of material and $220 in labor. Each finished product will sell for $450.

How many units must be sold each month to break even?

What level of monthly revenue is necessary to break even?

What is the expected profit for sales levels of 1,000, 2,500, and 5,000 units respectively.

Answer 1

Variable cost per unit

= Material cost + Labor cost

= $160 + $220

= $380 per unit

Contribution per unit

= Selling price per unit – Variable costs per unit

= $450 - $380

= $70 per unit

Contribution margin ratio

= Contribution / Sales x 100

= $70 / $450 x 100

= 15.56%

Break even point in units

= Fixed costs / Contribution margin per unit

= $300,000 / $70

= 4,285.71 units or 4,286 units (Since units cannot be in fraction)

Break even point in Sales revenue

= Fixed costs / Contribution margin ratio or Break even units x Selling price per unit

= $300,000 / 15.56% or 4,286 units x $450

= $1,928,571

The following table shows the expected profits for different sales levels

Calculations	Particulars	1000 units	2500 units	5000 units
A	Sales quantity	1,000	2,500	5,000
B	Contribution per unit	70	70	70
C = A x B	Total Contribution	70,000	175,000	350,000
D	Fixed costs	300,000	300,000	300,000
E = C - D	Expected profit	(230,000)	(125,000)	50,000