Question

A firm produces bikes by producing the frames by themselves and procuring other parts through its supply chain. It has its own assembly line to produce the bikes. Please calculate the Break Even Point in Dollars ($) AND in units for producing bicycles by the firm when: a. The production involves a fixed cost of $500,000 a year b. The production also involves a cost of producing the frames at $ 45.00 per bike, procurement of other parts at $23 per bike, and an assembly cost of $1000 per a batch of 40 bikes. c. The bikes are expected to be sold at a price of $150 a piece

Questions:

1. If the bikes are produced in batches of 40 per day and the firm operates its production on 25 weeks in a year, what is the break-even point for the firm?

2. With the batch process installed, if the firm operates only for 20 weeks in a year what should be the break-even points for the firm in terms of units and $?

Answer 1

1.

Selling price, s = $150
Unit variable cost, v = 45+23+ 1000/40 = $93
Fixed cost, F = $500,000

Breakeven point (units) = F / (s - v) = 500000 / (150 - 93) = 8,772 units

Breakeven point ($) = Breakeven point (units) * s = 8,772 * 150 = $1,315,800

2.

It does not matter how long the firm operates in a year. The fixed cost will be the same. There will be no change in variable cost or selling price as well. So, there is no reason the breakeven point will change. Yes, it is true that the company will need more time to attain breakeven.