Break-even point analysis
An electric item manufacturing company produces extension cords, has a variable cost of production $2.50 per unit and a selling price of $5.00 per unit. Fixed costs are $15,000. Current sales volume is 10,000 units. The firm can substantially improve the product quality by adding a new piece of equipment at the extension cord at an additional cost of $7,000. Variable cost would increase to $.50, but sales volume jump to 15,000 units due to a higher-quality product. Should the company buy the new equipment?
Note: Existing process: BEP = $15,000/(unit sale price – unit production cost)
Find the BEP for New equipment
Profit = (Price sold ) (Quantity) – [(Fixed Cost + (Variable Cost) (Quantity)]
Profit = P.Q. – (FC + V.Q.)