Question
Breakeven Analysis
CLA 1
Comprehensive Learning Assessment This assignment needs to develop a 5 pages
response containing a written narrative, figures, and charts. Milano Co.
manufactures and sells three products: product 1, product 2, and product 3.
Their unit selling prices are product 1, $40; product 2, $30; and product 3,
$20. The per-unit variable costs to manufacture and sell these products are
product 1, $30; product 2, $15; and product 3, $8. Their sales mix is reflected
in a ratio of 6:4:2. Annual fixed costs shared by all three products are
$270,000. One type of raw material has been used to manufacture products 1 and
2.
The company has developed new
materials of equal quality for less cost. The new material would reduce
variable costs per unit as follows: product 1 by $10 and product 2 by $5.
However, the new material requires new equipment, which will increase annual
fixed costs by $50,000.
• If the company continues to use the old
material, determine its break-even point in both sales units and sales dollars
of each individual product.
• If the company uses the new
material, determine its new break-even point in both sales units and sales
dollars of each individual product. (Round to the next whole unit.)
• What insight does this analysis offer management for long-term planning?
Expert Solution
In finance, the breakeven point represents the equivalence
of cost and profit. This is the point in business finances that the costs that
have been utilized in production have been rendered equal to the revenue that
Is expected. Therefore the value beyond the breakeven point is when revenue is
generated by the organization into profit. Furthermore, the difference between
the revenue and the breakeven point represents the profit margin of the
organization. Therefore, efficient production entails a lower breakeven point
or an attainable one so that the business can generate revenue and maximize
shareholder value. This will also ensure business longevity and all
stakeholders inclusive of the suppliers and employees benefit through the
insurance of slow breakeven point. Moreover,
this standard unit of measurement for organizational success is integral to
ensuring that the firm is producing efficiently and producing accountably.
Therefore, understanding the breakeven point is pertinent and this paper
delineates the calculation and implications
due to the attainment of the breakeven point as well as the impact of the
variation of the same on the business.
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