The company you work for has a high speed 5-axis milling machine which was purch
ID: 1254735 • Letter: T
Question
The company you work for has a high speed 5-axis milling machine which was purchased 5 years ago for $200,000 and has a 10 year life. This machine is currently idle and can be used to make a product designed by a research institute which requires at $10,000 license fee to use their design. Tooling costs $5000. Materials and consumables (cutting fluids, milling cutters, power, etc) are budgeted at $40 per product. Your company applies an overhead rate of 25% on all direct
costs to cover indirect costs.
2.1 At a sale price of $150, what is the breakeven point? (Show all calculations)
Explanation / Answer
According to the given information,
Depreciation = (Cost - Salvage value) / Useful life
= ($200,000 - $0) / 10
= $20,000
Therefore, the depreciation expense is $20,000
Calculating the total fixed costs:
Total fixed costs = Depreciation + License fees + Tooling cost
= $20,000 + $10,000 + $5,000
= $35,000
Therefore, the total fixed costs are $35,000
Calculating the variable cost per unit:
Variable cost per unit = Materials cost per product + 25% (Materials cost per product)
= $40 + 25% ($40)
= $40 + $10
= $50
Therefore, the variable cost per unit is $50
Given that selling price per product is $150
The formula for calculating the Break-even point is
BEP (Units) = Fixed costs / Contribution margin per unit
But contribution margin per unit is calculated as:
Contribution margin per unit = Selling price - Variable cost
= $150 - $50
= $100
Therefore,the contribution magin per unit is $100
Substituting the value in the above formula, we get
BEP (Units) = Fixed costs / Contribution margin per unit
= $35,000 / $100
= 350 units
Therefore, the BEP in units is 350