Break-Even Analysis: Manufacturing of Computer Stand by Bremend Ltd
Bremend Ltd. produces computer stands. Given the company’s cost structure, pricing policy, and capacity, it is important to look at its financial viability and possible profitability in manufacturing the product.
It has fixed costs of $500,000. Fixed costs are costs which do not change with the level of output or sales. Such costs include rent, salary, insurance, and equipment depreciation. The cost is independent of how many stands are produced or sold.
Each computer stand has a sale value of $120, a revenue figure per unit of the product sold. The variable cost per unit, or the cost of making each additional stand, is $70. Variable costs ### Generally includes raw materials, direct labour, and any other expenses that are directly linked with the manufacturing process. Contribution margin is the residual left from the selling price after subtracting the variable cost per unit. Bremend Ltd can calculate their contribution margin per stand as follows:
[ Contribution Margin = Selling Price – Variable Cost = 120 – 70 = 50 ]
This contribution margin of $50 per unit is used to cover fixed costs and, once covered, to generate profit.
Hence, the break-even point-the level of production and sales at which total revenues equal total costs and zero profit is earned-may be calculated as follows:
[Break-even point (in units)= fixed cost contribution margin per unit ]
Plugging in Bremend Ltd’s numbers:
\[ \text{Break-even Point} } = \frac{500,000}{50} = 10,000 \, \text{units}. This figure shows that Bremend Ltd needs to sell 10,000 computer stands to cover all its expenses. Any sales made after this time will contribute to profit. Since the factory has the capacity to manufacture 20,000 units, the company can produce and sell up to 20,000 stands per year.
If the company operates at full capacity and sells all 20,000 units, the total income is:
\[ \text{Total Revenue} = 20,000 * 120 = 2,400,000 \]
Total Variable cost will be:
Total Variable Cost = 20,000 * 70 = 1,400,000
To find the total profit at full capacity, subtract both total variable costs and fixed costs from total revenue. Total Profit = 2,400,000 – (500,000 + 1,400,000) = $500,000. The results of this study provide a clear picture of Bremen Ltd’s cost structure, breakeven sales, and potential profitability at full capacity. The understanding of these critical financial variables empowers the organization to make intelligent pricing, production level, and cost management decisions.
