Breakeven Pricing and Analysis
Vineet,
If you are interested.
I have entered the numbers for the attached problems. I would like to have you review for accuracy and corrections. In addition, I would like your take on question 2 of the attached word document.
As always thanks for your assistance.
B
Breakeven Pricing and Analysis
McCarthy Company has a plant capacity of 100,000 units per year, but its budget for this year indicates that only 60,000 units will be produced and sold. The budget for this year is:
Sales (60,000 units @ $4 $240,000
Less cost of goods produced (Based on 60,0000 units produced) $60,000
Direct Materials (Variable) $60,000
Direct Labor (Variable) $30,000
Variable overhead costs $45,000
Fixed overhead costs $75,000
Total Costs of goods produced $210,000
Gross Margin $ 30,000
Less Selling and Administrative Expenses
Selling (Fixed) $24,000
Administrative (Fixed) $36,000
Total Selling and Administrative expenses $ 60,000
Operating Income (loss) ($30,000)
1. Given the budgeted selling price and cost data, how many units would need to be sold to breakeven? (Hint: Be sure to consider selling and administrative expenses).
2. Market research indicates that if the selling price was dropped $3.80 per unit, it could sell 100,000 units. Would you recommend the drop in price? What would the new operating income or loss be?
