There are two ways to produce electric screwdrivers and each has a different cost structure though they could be sold for the same price:
Process A Process B
Unit sales price = $30.00 Unit sales price= $30.00
Unit variable cost = $15.00 Unit variable cost = $10.00
Fixed cost = $4,500 Fixed cost = $7,000
What is the break-even volume (i.e. how many screwdrivers must be sold to breakeven) for Process A?
If you sold 320 screwdrivers what would the profit be if you used Process A? What if you used Process B?
Which process (A or B) would you choose to use if you knew with certainty that you would sell 300 screwdrivers? What about if you knew with certainty that you would sell 350 screwdrivers? Explain.
Draw the break-even graph for either process A or B.
What if you want to reduce the breakeven quantity to 200 for process A and you could only change one item at a time (either fixed costs or unit selling price or unit variable cost) what would you change your fixed cost to? What would you change the unit-selling price to? What you would you change the unit variable cost to?
At what quantity will the profit be the same for process A and process B?
Lets say Chris sells hammers and the breakeven quantity is 950 hammers. If the final costs are $19,000 what is the unit selling price and the unit variable cost, if Chris knows that the unit selling price is "three and a half" times as much as the unit variable cost?
What would you change to make the breakeven quantity less? How would you change it increase or decrease? There are three things to change.
Here is the equation: Q=FE/(USP-UVC)
This solution provides detailed equations for break-even volume, profit, unit variable cost, and break-even quantity.