Question 12.6: A company is considering buying a manufacturing plant that a...
A company is considering buying a manufacturing plant that assembles programmable espresso makers and electronic milk steamers. The plant is expected to make and sell twice as many espresso makers as milk steamers. The factory has annual fixed costs, such as property taxes and insurance, of $5 million that are not identified with either the espresso makers or the milk steamers. The sales price and variable cost per unit of the espresso maker are $250 and $100, respectively. The sales price and variable cost per unit of the milk steamer are $200 and $75, respectively. How many units of espresso makers and milk steamers must be sold to break even?
To solve this problem, a ‘basket’ of both goods must be established. The products are made and sold in a two-to-one proportion; therefore, the basket should contain two programmable espresso makers and one electronic milk steamer. The sales revenue of this basket is (2 × $250/espresso maker) + (1 × $200/milk steamer), or $700. The variable cost of this basket is (2 × $100/espresso maker) + (1 × $75/milk steamer), or $275. The break-even quantity of this basket is: Quantity = ($5,000,000/($700 – $275) = 11,765 baskets The 11,765 baskets are equivalent to 23,530 programmable espresso makers and 11,765 electronic milk steamers.