Answer to Question #193072 in Management for Many

Question

The Fastline panel has the following data:

Overheads: £18,000

Fixed cost tooling: £2,000

Variable cost per unit: £18

The director of manufacturing requires you to produce an analysis for production volumes in the range of 100 to 1400 per month.

(a)​Based on a selling price of £40, construct a break-even chart and use this to find the break-even volume.

(b)​Investigate the effect of increasing the selling price to £45.

(c)​It is decided to fix the production level at 1000 units a month with each unit selling for £45. A few weeks later Microtronics receives an enquiry from a new customer. This is a DIY store and it wants to place a trial order of 500 units but at the 

non-negotiable price of £35 per unit. Should the company accept the order given that the average cost per unit based on a 1000 units a month run is £38?

Answer 1

a) Break-even volume = Total fixed cost/ (revenue per unit- variable costs per unit)

= 2000/ (40-18)

= 2000/ 22

= 90.1 units

b) Price elasticity = % change in quantity demanded / % change in price

= 400%/12.5%

=32%

As such, quantity demanded reduces by 32%.

c) The company should negotiate an increase in the price of the product for the DIY store. Selling at 35£ per piece will cause a loss to the company. Selling at the value increases the total costs and lowers the total revenue. The DIY company can buy the products at a wholesale price of 40£.