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CVP Analysis

1. Dr. Gulakowicz is an orthodontist. She estimates that adding two new chairs will increase fixed costs by $150,000, including the annual equivalent cost of the capital investment and the salary of one more technician. Each new patient is expected to bring in $3,000 per year in additional revenue, with variable costs estimated at $1,000 per patient. The two new chairs will allow the Dr. to expand her practice by and many as 200 patients annually. How many patients would have to be added for the new process to break even?

2. Two different manufacturing processes are being considered for making a new product. The first process is less capital intensive, with fixed costs of only $50,000 per year and variable costs of $7,000 per unit. The second process has fixed costs of $400,000 but variable costs of only $300 per unit.

a. What is the break even quantity, beyond which the second process becomes more attractive than the first?
b. If the expected annual sales for the product is 800 units, which process would you choose?

Solution Preview

1. Dr. Gulakowicz is an orthodontist. She estimates that adding two new chairs will increase fixed costs by $150,000, including the annual equivalent cost of the capital investment and the salary of one more technician. Each new patient is expected to bring in $3,000 per year in additional revenue, with variable costs estimated at $1,000 per patient. The two new chairs will allow the Dr. to expand her practice by and many as 200 patients ...

Solution Summary

There are two problems. Solution describes the steps to find out break even point in the given cases.

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