Cost and Profit Analysis for Bremend Ltd.’s Computer Stands
Bremend Ltd. manufactures computer stands; therefore, any insight into the company’s cost structure and profit potential is of utmost importance to a strategic planner. Shown below is a detailed analysis of the firm’s financial data.
Fixed and variable costs
Bremend Ltd. has fixed costs of $500,000. Fixed expenses do not change regardless of the number of units produced and provide a minimum expense that the organization needs to match. In addition to fixed costs, each computer stand has a variable cost of $70.00. Variable costs vary based on the level of production and must be paid based on each unit produced.
Revenue and Selling Price
The selling price of each computer stand is $120. The amount is sufficient to generate cash, and after deducting Variable costs, it can help meet the fixed costs and translate to profitability.
Contribution Margin
As a basis of measuring the contribution of each stand in paying for the fixed costs and giving a profit, we use the contribution margin per unit. It is defined as the selling price less the variable cost.
The contribution margin is the difference between the selling price and the variable cost.\\[ \\text{contribution margin } = \\$120 – \\$70 = \\$50 \\]This dollar amount per unit is available to cover fixed costs and then to contribute to profit.Break-even AnalysisTo find the break-even point-the number of units that must be sold to cover all costs-we can use the following formula:\\[ \\text{break-even point (units)} = \\frac{\\text{fixed costs}}{\\text{contribution margin per unit}} \\][ Break-Even Point = = 10,000 units ].
Therefore, Bremend Ltd should sell 10,000 units to break even. Sales beyond this Points will contribute to profit.
Capacity and sales potential
The capacity of the factory is 20,000 units. Full capacity utilization of the factory will allow Bremend Ltd to multiply its break-even sales by four times and generate a reasonable profit. Having the capacity to produce and sell as high as 20,000 units with the existing cost structure and selling price, the company can generate considerable income and profit.
Lastly, every financial plan in place for Bremend Ltd. should aim at meeting and, if possible, surpassing the 10,000-unit break-even requirement to ensure factory capacity utilization to the fullest and to realize all possible profits.
