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Break-Even Analysis: Computer Stand Manufacturing – Bremend Ltd.
Bremend Ltd. is involved in the manufacture of computer stands. Trying to understand more about the financial performance of their activities, a break-even analysis needs to be conducted. This study will help in calculating the number of units that need to be sold for the business to break even and generate profits.
**Fixed and Variable Costs**
First, let us take up the costs. Bremend Ltd. has fixed costs of $ 500,000. “Fixed costs” are costs that do not vary no matter how many units are produced or sold. Examples include salaries, rent, and depreciation.
Bremend Ltd. also pays a variable cost of $ 70 per unit in addition to the fixed costs. Variable costs are costs that depend upon the level of production.These may relate to Bremend Ltd. and would thus encompass direct labor, raw materials, in addition to other variable costs that vary with the level of production.
**Selling Price**
Bremend Ltd sells each of its computer stands at $120. This is the amount of profit the firm will make from selling each unit.
**Calculating Break-Even Points**
The break-even point is the number of units that must be sold to equal total income less total costs, including both fixed and variable. It can be retrieved from the formula shown below:
$\\text{Variable Cost per Unit} – \\frac{\\text{Fixed Costs}}{\\text{Selling Price per Unit} ] is the break-even point in units
Change the values given below:
The break even point, in units, is given by \\\\frac{500,000}{120 – 70} = \\\\frac{500,000}{50} = 10,000 \\\\text{ units} \\\\].
Hence, for breakeven, that is, to recover its fixed and variable costs, Bremend Ltd. has to sell 10,000 computer stands. **Capacity Constraints**
Note that Bremend Ltd.’s plant can only produce a maximum of 20,000 units at a time. This means that the company will start deriving profit from selling above 10,000 units. The production constraint makes it impossible for the business to go above the 20,000 units mark. This underlines the need for effective sales and production management for maximum returns within this limit.
