Chapter 2: 3BP (page 146)

Therapeutic Systems sells its products for $13 per unit. It has the following costs:
Rent
$145,000
Factory labor
$4.00 per unit
Executives under contract
$186,500
Raw material
$1.20 per unit
Separate the expenses between fixed and variable costs per unit. Using this information and the sales price per unit of $13, compute the break-even point.

Short Answer

Expert verified

Rental expenses and the executives under contract expenses are considered as the fixed cost and the factory labor cost and the raw material expenses are considered as the variable cost.

The break-even point of the company is 42,500 units.

Step by step solution

Bifurcation of different cost as fixed cost and variable cost

Rent	Fixed cost
Factory labor	Variable cost
Executives under contract	Fixed cost
Raw material	Variable cost

Break-even point

$\begin{array}{rcl} Break even point & = & \frac{Fixed cost}{(Revenue per unit - Variable cost per unit)} \\ = & \frac{($ 145, 000 + $ 186, 500)}{($ 13 - ($ 4 + $ 1.20))} \\ = & \frac{$ 331, 500}{$ 7.80} \\ = & 42, 500 units \end{array}$

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	20X1	20X2
Sales	\(3,230,000	\)3,370,000
Cost of goods sold	2,130,000	2,850,000
Gross profits	\(1,100,000	\)520,000
Selling and administrative expenses	298,000	227,000
Operating profits	\(802,000	\)293,000
Interest expense	47,200	51,600
Income before taxes	\(754,800	\)241,400
Taxes (35%)	264,180	84,490
Income after tax	\(490,620	\)156,910

Cash	\)163,000
Accounts receivable	924,000
Inventory	1,063,000
New plant and equipment	520,000
Total assets	$2,670,000

Short Answer

Step by step solution

Bifurcation of different cost as fixed cost and variable cost

Break-even point

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Rent	\)145,000
Factory labor	\(4.00 per unit
Executives under contract	\)186,500
Raw material	\(1.20 per unit