A manufacturing company has to decide between their current process which has a variable cost of $10/unit and investing in new equipment which will reduce the variable cost to $5/unit. The new equipment will cost $100,000. Use a break-even analysis to determine the number of units that the company will need to build to make the investment in the new equipment worthwhile. What is the break-even volume?
To determine the break-even volume, we need to compare the costs of the current process and the new equipment.
1. Calculate the break-even volume formula:
Break-even volume = Fixed cost / (Current cost per unit - New cost per unit)
2. Identify the fixed cost: Since it is not mentioned in the question, we assume there is no fixed cost, i.e., it is zero.
3. Take the current cost per unit: It is mentioned that the variable cost for the current process is $10/unit.
4. Take the new cost per unit: It is mentioned that the variable cost for the new equipment is reduced to $5/unit.
5. Plug in the values into the formula:
Break-even volume = 0 / ($10/unit - $5/unit)
Break-even volume = 0 / $5/unit
Break-even volume = 0
The result of the calculation is 0. This means that with no fixed cost, the manufacturing company needs to produce at least 0 units to make the investment in the new equipment worthwhile. However, this seems like an anomaly, as producing zero units will lead to zero revenue. Please check if there is any additional information or a potential mistake in the provided information to accurately determine the break-even volume.