Horton and Associates produces two products named BigBlast and LittleBlast. Last month 4,000 units of BigBlast and 1,000 units of LittleBlast were produced and sold. Following are average prices and costs for last month: BigBlast LittleBlast
Selling price $100 $200
Direct materials (25)(75)
Direct labour (15)(35)
Variable overhead (5)(30)
Product line fixed costs (10)(40)
Corporate fixed costs (25)(25)
Average margin per unit $ 20 $( 5)
The production lines for both products are highly automated, so large changes in production cause very little change in total direct labour costs. Workers who are classified as direct labour monitor the production line and are permanent employees who regularly work 40 hours per week. All costs other than "corporate fixed costs" listed under each product line could be avoided if the product line were dropped.
What is the breakeven sales volume (in units)for BigBlast? (In other words, what is the sales volume at which Horton should be financially indifferent between dropping and keeping BigBlast?):
A)728 units
B)2,545 units
C)1,084 units
D)790 units

Question

Quizplus · Accepted Answer

To calculate the breakeven point, we need to find the sales volume at which Horton's total revenue equals its total cost.

Total cost per unit for BigBlast = direct materials + direct labour + variable overhead + product line fixed costs = 25+15+5+10 = $55
Total revenue per unit for BigBlast = selling price = $100

Breakeven volume for BigBlast = (Corporate fixed costs + product line fixed costs) / (Selling price per unit - Total cost per unit) = (25+(4,000*10)) / (100-55) = 728 units

So Horton should keep producing and selling BigBlast as long as the sales volume is more than 728 units.

Therefore, the best choice is to keep producing BigBlast.

Horton and Associates Produces Two Products Named BigBlast and LittleBlast