Question

Heinrich is a manufacturing engineer Company. He has determined the costs of producing a new product to be as follows: Equipment cost: $288,000/year Equipment salvage value at EOY5 = $ 41,000 Variable cost per unit of production: $14.55 Overhead cost per year: $48,300 If the Miller Company uses a 5-year planning hori- zon and the product can be sold for a unit price of $39.75, how many units must be produced and sold each year to break even? Contributed by Paul McCright, University of South Florida

Answer 1

Given that cost of equipment is S288,000, overhead cost per year is S48,300 Variable cost is S14.55 per unit and selling price is S39.75 per unit. The calculation of total cost and total revenue is shown below: TC - FC+VC - S288, 000+S48, 300+14.550 S336,300+14.550 TR-PO -39.750 Following is the way to calculate the units that must be produced and sold each year to break even TC = TR 336,300 +14.55Q -39.750 336,300 25.200 13,345 Thus, the number of units that would need to be produced is 13,345 units But for the fifth and final year, the production of units will differ. The reason is the salvage value received at the end of the year 5 Following is the way to calculate the units that must be produced and sold each year to break even TC - Salvage Value TR 336,300 +14.55Q-41,000 - 39.75Q 295,300 25.200 11,718 Thus, the number of units that would need to be produced in the final year is 11,718 units Conclusion Form year 1 to year 4, the optimum production is 13,345 units but in final year, the optimal production is 11,718 units.