Production of Product A is to be scaled down, but its level of fixed costs has been assumed to be unchanged.
The break even unit for the aggregate production is 1,035,686 units. Calculation of the break even points using the new estimates: Breakeven points have been calculated using the formula: Breakeven number of units = Fixed costs / Contribution margin per unit, where Contribution margin per unit = Selling price – Variable cost per unit
To pay the extra dividend of 50% and to retain the profit of 150,000 we need to have the profit after taxes as 600,000.
As half of the revenues go to the government as taxes therefore the total revenues before tax deduction should be equal to 1,200,000.
What can the company afford to invest for additional “C” capacity? Break even analysis can be used to decide whether to alter the existing product emphasis or not. In this case, based from previous year’s data, it is not feasible to manufacture product C at 2.40 / unit. Below table provides checking whether the company can afford to invest in additional C capacity.
Break-Even analysis explains the relationship between cost, production, volume and returns. It can be extended to show how changes in fixed cost, variable cost, commodity prices, revenue will affect profit levels and break even points. Break even analysis is most useful when used with partial budgeting, capital budgeting techniques. The break even analysis helps understand and formulate the relationship between costs (fixed and variable), output and profit. The technique can be used to set sales targets and/or prices to generate target profits. In a wide product range, the analysis helps to find out which products are performing well and which are leading to losses .It is also versatile enough to include items like donations, wage increases, etc. that directly or indirectly affect costs.
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