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. 1.. If the bikes are produced in batches of 40 per day and the firm operates its production on 250 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 200 weeks in a year what should be the break-even points for the firm in terms of units and $?
3. How the break-even point will change if the fixed cost per year is expected to increase by 20%?
4. Other things remain the same, if one of the variable cost increases, how will it change the break-even point; increase or decrease? (mention either the BEP_x or BEP_$ or both)
5. If the selling price increases, will it effect the BEP? If so which one and how (increase or decrease).

Answer 1

	a. Fixed Cost/yr	500000
	b. Cost of producing frames/bike	45
	c. Other part cost	23
	d. Assebly cost/40 bike	1000
	e. Assebly cost/bike	25
	f. Total cost/bike (b+c+e)	93
	g. Selling price/bike	150
	h. Contribution/bike (selling price-cost)(g-f)	57
	i. BEP in units (Fixed cost per year/Contribution per bike)(a/h)	8772
	j. BEP in $ (BEP units*Selling price)(i*g)	1315800
Q 1	BEP does not depend on number of unit produced per year, it will remain same irespective of number of days worked/year
	No of cycles/day	40
	No of days/year	250	in question its given 250 weeks/year which is not possible as maximum week/year is 52
	Total units to produce	10000
	BEP	8772
Q2	No of cycles/day	40
	No of days/year	200	in question its given 200 weeks/year which is not possible as maximum week/year is 52
	Total units to produce	8000
	BEP	8772
	Manufacturing unit will be in loss as total production/yr is less than BEP numbers
Q 3	Fixed cost increased by 20%
	New fixed cost	600000
	BEP (New fixed cost/contribution/unit)	10526
	BEP increase by 20%
Q 4	IN case of increase in variable cost,
	contribution will reduce as contribution=selling price-cost per unit
	As BEP=total fixed cost/contribution per unit so BEP will increase in both the case BEPx and BEP$
Q5	In case of increase in selling price
	contribution will increase as contribution=selling price-cost per unit
	As BEP=total fixed cost/contribution per unit so BEP will decrease in both the case BEPx and BEP$