Question

Oriole’s Candles will be producing a new line of dripless candles in the coming years and has the choice of producing the candles in a large factory with a small number of workers or a small factory with a large number of workers. Each candle will be sold for $10. If the large factory is chosen, the cost per unit to produce each candle will be $3.00. The cost per unit will be $7.80 in the small factory. The large factory would have fixed cash costs of $2.5 million and a depreciation expense of $300,000 per year, while those expenses would be $560,000 and $100,000, respectively in the small factory.

Calculate the accounting operating profit break-even point for both factory choices for Oriole’s Candles. 

1. large factory break even? 

2. small factory break even? 

Answer 1

Answer 2

1. Large factory Break-even point = ( Fixed cash costs + Depreciation expense ) / ( Selling price per unit - Variable cost per unit ) = ( 2500000 + 300000 ) / ( 10 - 3.00 )	400000	Units
2. Small factory break-even point = ( Fixed cash costs + Depreciation expense ) / ( Selling price per unit - Variable cost per unit ) = ( 560000 + 100000 ) / ( 10 - 7.80 )	300000	Units