Question

A small but growing manufacturer of business class network routers. They produce two main types of routers, Model A and the more expensive variant, Model B. The company has a capacity of producing 500 Model A routers per month and currently produces 300 routers of that type every month. The routers are sold to small computer stores. The company’s expenses are $30,000.

What are the contribution margin and the contribution rate [round to a full number]?

What is the break-even point in units? At their current level of production, how many units above or below the break-even point is company working at?

How much profit per month would be earned at the current level of production?

At the current level of production what percent of capacity is utilized?

What is the BE volume as a percent of current production [use the rounded number of BE units]?

What is the BE volume as a percent of capacity [use the rounded number of BE units]?

Company has decided to increase its production from the current 300 routers per month to 425 routers per month, while at the same time lowering its selling price to $85. How would this change the company’s profit?

A chain store wants to purchase additional routers from company on a regular basis. To meet the new demand, company expanded their facility by renting additional space. This increased their total fixed cost by 30% and doubled their capacity to 1200 units. company wants to break-even at 25% of this new capacity. What is the lowest price they can charge per router and still break-even?

This is the complete information and there is no other values provided so, please do not say need more information. Please explain in details. Thank You.

Answer 1

IN THIS PROBLEM SALES PRICE OF MODEL A ROUTERS ARE NOT MENTIONED AND THE AMOUNTS OF FIXED COST AND VARIABLE COST ARE NOT SHOWN SEPARATELY.SINCE IT IS NOT POSSIBLE TO CALCULATE CONTRIBUTION WITHOUT SALE PRICE AND VARIABLE COST,IT IS ASSUMED THAT SALE PRICE OF EACH MODEL A ROUTER IS $100 AND FIXED AND VARIABLE COST ARE $15000 EACH WHICH TOTALS $30000 AS GIVEN IN THE PROBLEM.

TOTAL SALES = 300 UNITS @ $100 EACH = $30000

VARIABLE COST = $15000

1,CONTRIBUTION = SALES - VARIABLE COST = $30000 - $15000 =$15000

2.CONTRIBUTION RATE = (CONTRIBUTION / SALES) * 100 = (15000 /30000) * 100 = 50%

3.BREAK EVEN POINT IN UNITS = FIXED COST / CONTRIBUTION PER UNIT

WHERE, CONTRIBUTION PER UNIT = TOTAL CONTRIBUTION / NUMBER OF UNITS SOLD = 15000 / 300 = $50

THEREFORE BREAK EVEN POINTS IN UNIT = 15000 / 50 = 300 UNITS.  

4. THE CURRENT LEVEL OF PRODUCTION OF THE COMPANY IS 300 UNITS. BREAK EVEN UNITS OF THE COMPANY IS ALSO 300 UNITS. THEREFORE THE COMPANY IS WORKING AT 300 - 300 UNITS = 0.IT MEANS THAT THE COMAPNY IS WORKING AT BREAK EVEN POINT.

5. PROFIT = SALES - TOTAL EXPENSES

SALES =$30000

TOTAL EXPENSES =$30000

THEREFORE PROFIT = $30000 - $30000 = NIL.

6. CAPACITY UTILISATION = (CURRENT CAPACITY / TOTAL CAPACITY) * 100 = (300 / 500) *100 = 60%

7. BE VOLUME AS A % OF CURRENT PRODUCTION = (BREAK EVEN UNITS / CURRENT PRODUCTION) * 100 = (300 / 300) *100 = 100%.

8. BE VOLUME AS A % OF CAPACITY = ( BREAK EVEN UNITS / TOTAL CAPACITY) * 100 =  (300 / 500) * 100 = 60 %.

9. CALCULATION OF PROFIT WHEN PRODUCTION AND SALES ARE CHANGED

PROFIT CAN BE CALCULATED AS FOLLOWS:

PROFIT = (SALES * CONTRIBUTION RATE) - FIXED COST

WHERE SALES = 425 * 85 = $36125

CONTRIBUTION = $36125 - $15000 = $21125

CONTRIBUTION RATE = (21125 / 36125) * 100 = 58%(APPROX.)

FIXED COST = $15000

THEREFORE PROFIT = ( 36125 * 58%) - 15000 = $6125 (APPROX.)

10. CALCULATION OF SALE PRICE WHEN FIXED COST INCREASES

FIXED COST INCREASES BY 30%. THEREFORE FIXED COST = 15000 * 130% = $19500.

BREAK EVEN UNITS = 1200 * 25% = 300 UNITS

CONTRIBUTION RATE = FIXED COST / BREAK EVEN UNITS = 19500 / 300 = 65%

SALES = (FIXED COST + PROFIT) / CONTRIBUTION RATE = (19500 + 0) / 65% = $30000

THEREFORE SALES PRICE PER UNIT = 30000 / 300 = $100.

AS MENTIONED ABOVE SOME AMOUNTS ARE ASSUMED SINCE NOT PROVIDED IN THE PROBLEM.