You work for Bellevue Window Products. While performing an analysis for a new window product, you found a report from last year that provided the following information regarding the manufacture of a similar product: annual production rate = 40,000 units; selling price = $70 per unit; fixed production cost = $240,000 per year; variable production cost = $1,700,000 per year; variable selling expenses = $96,000 per year. As a first-cut, you decide to use this information to estimate (a) the breakeven production rate per year, (b) the company’s profit last year, and (c) the annual production rate that would generate a profit of $1,000,000 per year. What are your estimates?
What will be an ideal response?
(a) First express all variable costs In terms of cost per unit and then find breakeven production rate.
Variable production cost = 1,700,000/40,000
= $42.50
Variable selling expenses = 96,000/40,000
= $2.40
Breakeven production = income - cost
= 70x - (240,000 + 42.50x + 2.40x)
25.1x = 240,000
x = 9562 units per year
(b) Profit = 40,000(70) - [(240,000 + 40,000(42.50) + 40,000(2.40)]
= 2,800,000 - 2,036,000
= $764,000
(c) 1,000,000 = 70x - [(240,000 + x(42.50) + x(2.40)]
x = 49,402
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