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Break-even analysis for sofas

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Sales (50 sofas/week at $1000 per sofa)........................................................................$50,000

Less: Cost of goods (sofas) sold

Variable cost of manufacturing sofas..............................$20,000

Fixed manufacturing cost....................................................$5,000.......................$25,000

Equals: Gross margin.........................................................................................................$25,000

Less: Selling and Administrative cost:

Variable Selling and Administrative costs........................$10,000

Fixed Selling and Administrative costs................................$5,000......................$15,000

Net income............................................................................................................................$10,000

1.) Determine the firms break-even quantity of sofas
2.) Compute the Following measures at the break-even quantity.
ATC_______AFC ________ AVC___________MC______
3.) Determine the firm's new break-even quantity if it builds a new plant that raise fixed cost
of manufacturing to $10,000 but decreases variable manufacturing cost to $300 per sofa. Assume that average variable selling expenses, fixed selling expenses, and that the selling price of sofas remain the same as in A.

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Solution Summary

The solution contains step by step workings of finding out the break-even point under various scenarios.

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Solution:
1) Break-even quantity = Fixed cost / [Selling price per unit - Variable cost per unit]
= $5,000 / [$1000 - ($20,000/50 sofas)]
= $5,000 / [$1000 - $400]
= $5,000 / $600
= 8.33 units (or) 9 units ...

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Radhika Lakshmi, MPhil
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  • MCom, Annamalai University
  • IATA, International Air Transport Association
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