Company X incurs fixed overhead costs of $216,000 every year,

Question is misleading, It should have asked what is the min break even price...... rather than what is break even price. as it will change as we increases the units more than 500

Hi chetan2u,

Considering 500 units, we'll get the maximum break even price. Since we don't know the exact number of units produced, the break even price will vary.
In such a scenario, since the exact price can't be determined, should we not go for option E?

Thanks & Regards,
Lipun

The question says 500 units per month , so shouldn't we multiply 500 with 12 ?? since the fixed price is on per year basis

Hi,

Break even price can be just one, so somehow Minimum or Maximum BEP really don’t make sense here.
There is a certain expenditure for setting of factories and other costs.
There is a certain production price which varies with the number of units =>
so production costs \(\alpha\) number of units
Production cost=x*n, where x is constant and n the number of units.
So the question is perfectly fine except, it should have omitted ‘at least’ in statement II. But the statement II clearly means that you require 500 to break even.

The question could have been worded a bit better but we should not complicate a question by reading too much in a statement.

Yes, you are correct.

At least 500 units doesn't meant that it should be 500...it can be any value from 500 So how it will be C? it should be E

Company X incurs fixed overhead costs of $216,000 every year, production costs that vary directly with the number of units produced, and no other costs. What price per unit should the company charge to break even for the year, if it can sell all of its output?

1)For every 100 units the company produces, it incurs $250 in production costs in addition to its fixed overhead costs.

2)The firm must produce and sell at least 500 units per month on average in order to break even for the year.[/quote]


The overall cost =216000+n*x, where n is the number of the items produced and x, the cost of each.
We are looking for value of x+216000/n, so value of x and n.

1)For every 100 units the company produces, it incurs $250 in production costs in addition to its fixed overhead costs.
So production cost is 250/100, but we do not know n.

2)The firm must produce and sell at least 500 units per month on average in order to break even for the year.
So n=500. But x=??

Combined.
n=500 and x=2.5
Answer =2.5+216000/500.

C[/quote]

Hi chetan2u,

Considering 500 units, we'll get the maximum break even price. Since we don't know the exact number of units produced, the break even price will vary.
In such a scenario, since the exact price can't be determined, should we not go for option E?

Thanks & Regards,
Lipun[/quote]


Hi,

Break even price can be just one, so somehow Minimum or Maximum BEP really don’t make sense here.
There is a certain expenditure for setting of factories and other costs.
There is a certain production price which varies with the number of units =>
so production costs \(\alpha\) number of units
Production cost=x*n, where x is constant and n the number of units.
So the question is perfectly fine except, it should have omitted ‘at least’ in statement II. But the statement II clearly means that you require 500 to break even.

The question could have been worded a bit better but we should not complicate a question by reading too much in a statement.[/quote]

How can be it C? here we have to fix both unit price and number of units.If price is fixed then we can easily say at this point breakeven happened. Here that is not the case. So we have enough flexibility to alter the price and number of units produced depending on the convince Hence E