Question

Simpson Company is analyzing whether its new product will be profitable. The following data are provided for analysis: Expected variable cost of manufacturing $30 per unit Expected fixed manufacturing costs $48,000 per year Expected sales commission $6 per unit Expected fixed administrative costs $12,000 per year 1. Simpson estimates that sales will probably be 10,000 units.

1. What sales price per unit will allow the company to break even?

2. Simpson has decided to advertise the product heavily and has set the sales price at $52. If sales are 9,000 units, how much can the company spend on advertising and still break even?

Answer 1

In accounting, the break-even point formula is determined by dividing the total fixed costs associated with production by the revenue per individual unit minus the variable costs per unit. In this case, fixed costs refer to those which do not change depending upon the number of units sold. Put differently, the breakeven point is the production level at which total revenues for a product equal total expenses.

Given
variable cost
variable cost of manafacturing	$30 P.U
sales commission		$6 P.u
Total			$36 p.u
Fixed Cost
Fixed cost of manafacturing	$48,000
Fixed admin		$12,000
Total			$60,000
Let sale price per unit be X
Break even point	=	Fixed cost / contribution P.U
	10000	=	$60000/x-36
	10000x-360000	=	60000
	x	=	420000/10000
	x	=	42
	sale price is $42 P.u
let advertisment cost be Y
Break even point	=	Fixed cost / contribution P.U
	9000	=	$60000+Y/52-36
	144000	=	60000+Y
	Y	=	84000
advertisment cost to be spent is $84000 to arive brek even