Break-even analysis. TimeKeepers is about to introduce a new LED clock and has determined that it will charge $30 per clock. The firm must decide whether or not to purchase a high-capacity clock-making machine. If the high-capacity machine is selected, then the fixed costs for the firm will be $5,000 per year, with variable costs of $5 per clock. Otherwise the fixed costs will be $1,000, with variable costs of $15 per clock. Above what level of expected sales should TimeKeepers choose the high fixed cost alternative to maximize pretax operating cash flow?

Question

Quizplus · Accepted Answer

The breakeven point is where the total revenue equals the total cost. For the high fixed cost alternative, the total cost is $5,000 + $5 per clock. For the low fixed cost alternative, the total cost is $1,000 + $15 per clock. The total revenue is $30 per clock. So, the breakeven point for the high fixed cost alternative is 5,000 / (30 - 5) = 400 units.

Break-Even Analysis