Calculating the BEP and contribution margin in the given case
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1.ABC Manufacturing is unsure of the ideal price to quote for one of their products, a pump. ABC's president has asked you to do a break-even analysis for the pump, and to recommend the optimal price. The fixed costs (FC) associated with manufacturing this particular product are $100,000, and the variable costs (VC) are $50 per unit. ABC's president is considering a selling price (P) for this product of $100. The president wants to know how many units have to be sold in order to break even (BEU).
Evaluate the operations management issue?
Provide the algebraic equation (using BEU, FC, P, and VC as variables) for the breakeven analysis.
Calculate and provide the numeric breakeven value.
2. ABC's president believes there is substantial competition for this type of pump, and that price is a significant factor in potential customer's purchase decision. He estimates that the company will sell 3,600 pumps (unit volume or UV) if they are priced at $100, and will sell 2,900 pumps if they are priced at $110. He wants to know what contribution to profit (CP) would result from each of those two selling prices, and thus which is the better price.
Evaluate the operations management issue.
Provide the algebraic equation (using CP, UV, P, and VC as variables) for this analysis.
Calculate and provide the numeric contribution to profit (in dollars) for each of the two price points.
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Solution Summary
Solution provides the algebraic expressions and methodology to estimate the BEP and contribution margin in the given case.
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1. ABC Manufacturing is unsure of the ideal price to quote for one of their products, a pump. ABC's president has asked you to do a break-even analysis for the pump, and to recommend the optimal price. The fixed costs (FC) associated with manufacturing this particular product are $100,000, and the variable costs (VC) are $50 per unit. ABC's president is considering a selling price (P) for this product of $100. The president wants to know how many units have to be sold in order to break even (BEU).
Evaluate the operations management issue?
A firm's break-even point is the unit volume or total sale revenues that a firm must generate in order to meet at least its costs. At this point, the company neither makes a profit nor suffers a loss. Break-even point can provide a simple but powerful quantitative tool for operation management. Breakeven analysis gives an idea whether or not revenues from a product or service can meet its relevant costs of production. This ...
Education
- BEng (Hons) , Birla Institute of Technology and Science, India
- MSc (Hons) , Birla Institute of Technology and Science, India
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