Question

Solomon Company is considering adding a new product. The cost accountant has provided the following data:

Expected variable cost of manufacturing	$	43	per unit
Expected annual fixed manufacturing costs	$	60,000

The administrative vice president has provided the following estimates:

Expected sales commission	$	5	per unit
Expected annual fixed administrative costs	$	52,000

The manager has decided that any new product must at least break even in the first year.

Required

Use the equation method and consider each requirement separately.

If the sales price is set at $64, how many units must Solomon sell to break even?

Solomon estimates that sales will probably be 14,000 units. What sales price per unit will allow the company to break even?

Solomon has decided to advertise the product heavily and has set the sales price at $68. If sales are 8,000 units, how much can the company spend on advertising and still break even?

Answer 1

• Requirement 1

Let the no. of units to break even be ‘x’ units, then, at Break even point,

Sales – Variable cost – Fixed Cost = $ 0 Net Income

$64x – ($43 + 5)x – ($60,000 + $52,000) = $ 0

64x – 48x – 112000 = 0

16x = 0 + 112000

X = 112000 / 16

X= 7,000

No. of units to Break Even = 7,000 units

• Requirement 2

Let the sale price per unit be $ x, then at Break even point,

Sales – Variable cost – Fixed Cost = $ 0 Net Income

14,000 units x $x – [14,000 units x ($43 + $5)] – ($60000 + $ 52000) = $ 0

14000x – (14000 x 48) – 112000 = 0

14000x – 672000 – 112000 = 0

14000x = 672000 + 112000

14000x = 784000

X = 784000/14000

X= $ 56

Sale Price per unit required to Break Even = $ 56

• Requirement 3

Let the advertising expense be $ x, then at Break Even point,

Sales – Variable cost – Fixed cost – Advertising cost = $ 0 Net Income

[8000 units x $ 68] – [8000 units x ($43 + $5)] – (60000 + 52000) - $ x = $ 0

544000 – 384000 – 112000 – x = 0

544000 – 384000 – 112000 = x

X = $ 48,000

Answer: Company can spend $ 48,000 on advertising and still Break Even.