Need help on this Study Problem.
Chevy's Manufacturing has fixed costs (e.g. depreciation) of $40,000 which can be directly attributable to producing a particular product. the product sells for $2 a unit and variable costs are $1.20. What is the break-even point in units? Suppose the firm sold 100,000 units last year and expects volume to increase by 10 percent. What percentage increase in profits would Chevy's see with this increase in volume?
Ok, price less variable costs is 80 cents per unit. How many units are needed to cover the $40,000?
b) calculate the net profit at 100,000 and 110,000.
To find the break-even point in units, you need to determine how many units need to be sold in order to cover the fixed costs of $40,000.
The formula to calculate the break-even point is:
Break-even point (in units) = Fixed costs / (Price per unit - Variable cost per unit)
In this case, the fixed costs are $40,000, the price per unit is $2, and the variable cost per unit is $1.20.
Break-even point = $40,000 / ($2 - $1.20) = $40,000 / $0.80 = 50,000 units
Therefore, Chevy's Manufacturing needs to sell 50,000 units to cover their fixed costs and reach the break-even point.
Now let's calculate the net profit at 100,000 and 110,000 units.
Net profit is calculated as:
Net profit = (Price per unit - Variable cost per unit) x Number of units - Fixed costs
At 100,000 units:
Net profit = ($2 - $1.20) x 100,000 - $40,000
= $0.80 x 100,000 - $40,000
= $80,000 - $40,000
= $40,000
At 110,000 units:
Net profit = ($2 - $1.20) x 110,000 - $40,000
= $0.80 x 110,000 - $40,000
= $88,000 - $40,000
= $48,000
To calculate the percentage increase in profits, use the following formula:
Percentage increase in profits = (New profit - Old profit) / Old profit * 100
Percentage increase in profits = ($48,000 - $40,000) / $40,000 * 100
= $8,000 / $40,000 * 100
= 0.2 * 100
= 20%
Therefore, with the increase in volume from 100,000 units to 110,000 units, Chevy's Manufacturing would see a 20% increase in profits.