Factory X manufactures steam cleaners for engines and has a high level of sales
ID: 2648565 • Letter: F
Question
Factory X manufactures steam cleaners for engines and has a high level of sales variability. The units sell for $3,200 each but each unit contains about $1,280 in components and direct labor cost. Factory X also keeps the plant open even when sales are low at a cost of approximately $1,000,000 per year.
Answer the following questions:
List some examples of fixed costs for a typical manufacturing plant.
How much are the variable costs in this example?
What is the break-even level of units in this example?
What is the break-even level of sales in this example?
Explanation / Answer
Answer 1
Examples of fixed cost for a typical manufaturing plants are as follows:
Depreciation and Maintenance
The cost of leases
The interest element of loans
The payment of utility bills, such as water and electricity
Answer 2
Variable cost in our example is $1280 as it contains direct material cost and direct labor cost.
Given
Break-even level of sales
In order to find the breakeven sales we need to calculate the PV ratio which can be calculated by the given formula:
PV ratio = (sales - variable cost) / sales = (3200 - 1280) /3200
= 0.6
Since we have PV ratio we can find the Break even sales value. This can be determined by the given formula:
Breakeven level of sales = Fixed cost / PV ratio = 1000000 / .06 = $1,666,667
Break Even sales in units
Since we have PV ratio we have the Break even sales value. We can determine the Breakeven level in units. This can be determined by the given formula:
Breakeven level of sales / sales price per unit = 1,666,667 / 3,200 = 521 Units.
Given
Sales price $3,200 Variable cost per unit $1,280 Fixed cost per annum $1,000,000Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.