Suppose the price of your product is $10.00. The variable cost per unit is currently $5.00, and the fixed costs are $15,000 per month. Suppose the company can invest in some equipment that will reduce the variable cost per unit to $3.00. However, the cost of financing the new equipment will increase the fixed costs to $17,500 per month. Compare the breakeven points for these two different options. Assuming the company believes it can sell 2,800 units of its product at $10.00 price, which is the better choice?
What will be an ideal response?
Using the current production methods, the breakeven point is:
BP = 3,000 units
Using the new equipment, the breakeven point is:
BP = 2,500 units
Buying the new equipment will cause the number of units needed to break even to fall from 3,000 to 2,500 units. Thus, if the firm sells 2,800 units at a price of $10.00 per unit, it would be able to earn a profit using the new equipment, but it would not be able to break even using the current approach.
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