Example Lufki n Trailer Corporation assembles up to 30 trailers per month for 18

Question

Example Lufki n Trailer Corporation assembles up to 30 trailers per month for 18-wheel trucks in its east coast facility. Production has currently dropped to 25 units per month over the last 5 months due to a worldwide economic slow down in transportation services. The following information is available. Fixed costs FC = $750,000 per month Variable cost per unit $35,000 Revenue per unit $75,000 (a) How does the reduced production level of 25 units per month compare with the current breakeven point? (b) What is the current profit level per month for the facility? (c) What is the difference between the revenue per trailer and variable cost per trailer that is necessary to break even at a monthly production level of 15 units, if fixed costs remain constant? Pein

Explanation / Answer

ans

A) Break-even point (BEP) = Fixed cost / (Selling price - Unit variable cost)

Current BEP = $750,000 / $(75,000 - 35,000) = $750,000 / $40,000 = 18.75 units

Since BEP doesn't depend on actual units produced, reduced production level will not affect the BEP.

(B)

Current profit = Quantity x (Selling price - Unit variable cost) - Fixed cost

= 25 x $40,000 - $750,000 = $(1,000,000 - 750,000)

= $250,000

(C)

Using the BEP formula,

15 = $750,000 / (Selling price - Unit variable cost)

(Selling price - Unit variable cost) = $750,000 / 15 = $50,000 per trailer

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