Question

1. A plant has a capacity of 4,100 hydraulic pumps per month. The fixed cost is $504,000 per month. The variable cost is 4166 per pump, and the sales price is $328 per pump (assume that sales equal output volume). What is the breakeven point in number of pumps per month? What percentage reduction will occur in the breakeven point if fixed costs reduced by 18% and unit variable cost by 6%?

Answer 1

Given, Fixed cost = $ 504,000,

Variable cost = $ 166 per unit ( it is not 4166)

Sales price = $ 328

Let us assume number of units = Q

The break even point is that where Total revenue is equal to total cost.

Total Revenue = Total cost

P × Q = FC + V × Q

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Plug in the given values we get

Break even point = 3,111 units per month

Now when fixed cost decreases by 18% then the fixed cost will be equal to

New FC = $ 504,000(1 - 0.18) = $ 413,280

Variable cost to reduced by 6%

New VC = $ 166 (1 - 0.06) = $ 156.04

New breakeven point = 2,403 units per month

Change in break even point = 3,111 - 2,403 = 708 units

Percent change in breakeven point = 22.76 %

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