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1. • CommentAuthorMIke
   • CommentTimeMar 2nd 2007 edited

    
   I have 2 products A & B, product A has operating cost of $600,00 pa + $12 per unit flexible manufacturing costs, product B has operating costs of $1,400,000 + $10 flexible manufacturing costs- the answer is about 40,000 units break even, I think, but how is this calculated?
2. • CommentAuthorduncanwil
   • CommentTimeMar 8th 2007

    
   The formula for calculating the number of units to produce or sell to break even is
   
   total fixed costs/contribution per unit
   
   contribution per unit = selling priceper unit - variable cost per unit
   
   In your example, you don't tell us the sales values either by unit or in total so it is impossible to evaluate the BEP. However, working backwards we can deduce the sales value which you can then check!
   
   I will assume that operating costs are fixed costs (I might be wrong, so you have to check what the fixed costs are) and that the flexible costs are the variable costs.
   
   Then, using your estimate of a BEP of 40,000 units:
   
   40,000 = 2,000,000/x - 22 where x is the selling price per unit
   
   x - 22 = 2,000,000/40,000
   
   x - 22 = 50
   
   x = 50 + 22
   
   x = 72
   
   So now we think we know that the selling price per unit is £72. Note that your example relates to two products so this value of £72 is the composite or average of the two.
   
   That looks a bit more complex than it is but study it carefully and it should make sense.
   
   Duncan