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Introduction to Management Science 12th Edition by Bernard Taylor
Edition 12ISBN: 978-0133778847Introduction to Management Science 12th Edition by Bernard Taylor
Edition 12ISBN: 978-0133778847 Exercise 2
If Evergreen Fertilizer Company changes its production process to add a weed killer to the fertilizer in order to increase sales, the variable cost per pound will increase from $0.15 to $0.22. What effect will this change have on the break-even volume computed in Problem
Problem
If Evergreen Fertilizer Company in Problem 4 changes the price of its fertilizer from $0.40 per pound to $0.60 per pound, what effect will the change have on the break-even volume
Problem
If Evergreen Fertilizer Company in Problem 4 changes the price of its fertilizer from $0.40 per pound to $0.60 per pound, what effect will the change have on the break-even volume
Explanation
Verified
Verified
Fixed costs : Costs which remains fixed regardless of quantity produced. Example: Rent, overhead, taxes, and insurance etc.
Variable costs: Costs that vary directly with the quantity of units produced. Example: direct materials and labor.
Break-even analysis helps to understand total costs for different process and the production and sales required to compensate for the costs.
Break-even point (BEP) is the point at which sales revenue from goods sold is equal to the total cost incurred on the production of the goods.
Given, the fixed costs are approximately $25,000, variable costs are $0.22 per pound of fertilizer , and a selling price is adjusted to $0.60 per pound.
The formula to calculate break-even volume
Where,
v = break-even volume
p = selling price,
c f = fixed costs, and
c v = variable costs.
Substitute the given values and compute the break-even volume, as shown below:
To achieve the break-even status, the company would need to have the ability to produce 65,789.47 pounds of fertilizer annually.
Anything above or below that amount would result in a net profit or loss respectfully. When the company decided to add the weed killer ingredient and resulted in the variable costs increasing by $0.07 per pound to $0.22, this significant increased the volume by more than more than 20.00%.
Hence, it is important to see that a rise in raw materials can have a significant impact on the amount of volume needed to break even with respect to costs and revenues.
Variable costs: Costs that vary directly with the quantity of units produced. Example: direct materials and labor.
Break-even analysis helps to understand total costs for different process and the production and sales required to compensate for the costs.
Break-even point (BEP) is the point at which sales revenue from goods sold is equal to the total cost incurred on the production of the goods.
Given, the fixed costs are approximately $25,000, variable costs are $0.22 per pound of fertilizer , and a selling price is adjusted to $0.60 per pound.
The formula to calculate break-even volume
Where,v = break-even volume
p = selling price,
c f = fixed costs, and
c v = variable costs.
Substitute the given values and compute the break-even volume, as shown below:
To achieve the break-even status, the company would need to have the ability to produce 65,789.47 pounds of fertilizer annually. Anything above or below that amount would result in a net profit or loss respectfully. When the company decided to add the weed killer ingredient and resulted in the variable costs increasing by $0.07 per pound to $0.22, this significant increased the volume by more than more than 20.00%.
Hence, it is important to see that a rise in raw materials can have a significant impact on the amount of volume needed to break even with respect to costs and revenues.
Introduction to Management Science 12th Edition by Bernard Taylor
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