TOPIC: ACCOUNTING
Break-Even Analysis and Profitability of Bremend Ltd.
Manufacturing computer stands, Bremend Ltd is a company faced with various financial issues in its struggle to increase profitability. With fixed expenses of $500,000, the corporation has to keenly look into its cost structure so as to determine the break-even point and assess viability under the existing production constraints.
Bremend Ltd sells a computer stand for $120 and its variable cost is $70 per unit. Thus, the contribution margin would be $50 per stand, price minus the variable cost. This contribution margin is of prime importance in covering fixed expenses and creating a profit.
Now, the break-even point is calculated by dividing the total fixed costs by the contribution margin per unit.
Breakeven point = Fixed Cost / Contribution Margin per Unit = $500,000 /$50 = 10,000 units.
This means that to recover its fixed costs, Bremend Ltd has to manufacture and sell 10,000 computer stands. Anything above this level of sales contributes directly to the company’s profit.
However, Bremend Ltd’s capacity is limited to only 20,000 units of production. This constraint communicates that this company has the capacity to make and sell only this amount. Provided the company produces at full capacity, it will make revenues from 20,000 units. At a contribution margin of $50 per unit, the total contribution would be :
$ogenous Contribution = 20,000 x $50 = $1,000,000$.
After deducting $500,000 of fixed costs,Net profit would then be $500,000.
In general, the huge profit that Bremend Ltd can realize if it operates at full capacity; however, it is important to understand the break-even point as this knowledge is critical in making effective decisions on levels of production and pricing strategies.
